Exercise 11-13 (Algo) Transfer Pricing Situations [LO11-3]

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In each of the cases below, assume Division X has a product that can be sold either to outside customers or to Division Y of the same company for use in its production process. The managers of the divisions are evaluated based on their divisional profits.

	Case
		A		B
Division X:
Capacity in units		90,000		106,000
Number of units being sold to outside customers		90,000		85,000
Selling price per unit to outside customers	$	59	$	33
Variable costs per unit	$	25	$	10
Fixed costs per unit (based on capacity)	$	9	$	5
Division Y:
Number of units needed for production		21,000		21,000
Purchase price per unit now being paid to an outside supplier	$	55	$	20

Exercise 11-13 (Algo) Part 2

Required: 2. Refer to the data in case B above. In this case, there will be no savings in variable selling costs on intracompany sales.

a. What is the lowest acceptable transfer price from the perspective of the selling division?

b. What is the highest acceptable transfer price from the perspective of the buying division?

c. What is the range of acceptable transfer prices (if any) between the two divisions? If the managers are free to negotiate and make decisions on their own, will a transfer probably take place?

Req 2A Req 2B Req 2c What is the lowest acceptable transfer price from the perspective of the selling division? Lowest acceptable transfer price Req 2A Req 2B > Req 2A Req 2B Req 2c What is the highest acceptable transfer price from the perspective of the buying division? Highest acceptable transfer price Req 2A Req 2B Req 20 What is the range of acceptable transfer prices (if any) between the two divisions? If the managers are free to negotiate and make decisions on their own, will a transfer probably take place? Identify the range of acceptable transfer prices (if any): There is not a range of acceptable transfer prices. There is a range of acceptable transfer prices as shown below: Transfer price Are the managers likely to agree on a transfer price? OYes No