Exercise 13-33

Transfer pricing

Mogi Corp. manufactures one primary product, which is processed through two divisions (P and R). Costs for each division are:

P Division produces 25,000 gallons per month. R Division uses 40,000 gallons per month; of that, 25,000 gallons are purchased internally and 15,000 are purchased externally at $10 per gallon. After processing through R Division, a gallon of final product can be sold for $55.

a.What would be P's transfer price to R Division if the price is set at 180 percent of variable cost? If required, round your answer to the nearest cent.

$

b.What would be P's transfer price to R Division if the price is set at 130 percent of full cost? If required, round your answer to the nearest cent.

$

c.What would be P's transfer price to R Division if the price is set at market value?

$

d.What is Mogi Corp.'s operating profit if all 40,000 gallons of product are transferred in a month?

$

By how much would this profit increase if R Division could acquire all necessary gallons internally?

$