Exercise 11A-3 Transfer Pricing Situations [LO11-5]

[The following information applies to the questions displayed below.]

In each of the cases below, assume that 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 93,000 108,000 Number of units being sold to outside customers 93,000 89,000 Selling price per unit to outside customers $51 $33 Variable costs per unit $23 $15 Fixed costs per unit (based on capacity) $7 $5 Division Y: Number of units needed for production 19,000 19,000 Purchase price per unit now being paid to an outside supplier $46 $30

References Section BreakExercise 11A-3 Transfer Pricing Situations [LO11-5] 16. value: 1.17 points Required information

Exercise 11A-3 Part 1

Required:

1-a.

Refer to the data in case A above. Assume in this case that $3 per unit in variable selling costs can be avoided on intracompany sales.

1-b.

If the managers are free to negotiate and make decisions on their own, will a transfer take place?

No Yes

Hints References eBook & Resources Hint #1 Check my work 17. value: 1.28 points Required information

Exercise 11A-3 Part 2

2-a.

Refer to the data in case B above. In this case, there will be no savings in variable selling costs on intracompany sales. Determine the transfer price of the selling division.

2-b. If the managers are free to negotiate and make decisions on their own, will a transfer take place?

No Yes

2-c.

What is the range of transfer price the managers of both divisions should agree?