Exercise 8 (Transfer Pricing Situation)

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

	CASE
Division X	1	2
Capacity in units	100,000	100,000
Number of units being sold to outside customers	100,000	80,000
Selling price per unit to outside customers	50	35
Variable costs per unit	30	20
Fixed costs per unit (based on capacity)	8	6
Division Y
Number of units needed for production	20,000	20,000
Purchase price per unit now being paid to an outside supplier	47	34

Required:

1. Refer to the data in case A above. Assume that 2 per unit in variable selling costs can be avoided on intracompany sales. If the managers are free to negotiate and make decisions on their own, will a transfer take place? If so, within what range will the transfer price fall? Explain.
2. Refer to the data in case B above. In this case, there will be no reduction in variable selling costs on intracompany sales. If the managers are free to negotiate and make decisions on their own, will a transfer take place? If so, within what range will the transfer price fall? Explain.

Exercise 9 (Transfer Pricing; Decision Making)

Nikki Inc. manufactures sports equipment. The company is compromised of several divisions, each operating as its own profit unit. Division A has declared to go outside the company to buy materials, since it was informed that Division B was increasing its selling price of the same materials to P200. Information for division A and division B is as follows:

Outside price for materials	150
Division A's annual purchases	10,000
Division B's variable costs per unit	140
Division B's fixed costs	1,250,000
Division B's capacity utilization	100

Required:

1. Will the company benefit of division A purchases outside the company? Assume division B cannot sell its materials to outside buyers.
2. Assume division B can save 200,000 in fixed costs if it does not manufacture the material for division A. Should division A purchase from the outside market?
3. Assume the situation in requirement 1. If the outside market value for the material drops 20, should A buy from the outside?

Problem 7 (Transfer Pricing)

Canada Products, Inc., has a Valve Division manufactures and sells a standard valve as follows:

Capacity in Units	100,000
Selling price to outside customers	30
Variable costs per unit	16
Fixed costs per unit (based on capacity)	9

The company has a Pump Division that could use this valve in one of its pumps. The Pump Division is currently purchasing 10,000 valves per year from an overseas supplier at a cost of 29 per valve.

Required:

1. Assume that the Valve Division has ample idle capacity to handle of the Pump Division's needs. What is the acceptable range, if any, for the transfer price between the two divisions?
2. Assume that the Valve Division is selling all of the valves that it can produce to outside customers. What is the acceptable range, if any, for the transfer price between the two divisions?
3. Assume again that the Valve Division is selling all of the valves that it can produce to outside customers. Also assume that P3 in variable expenses can be avoided on transfers within the company, due to reduced selling costs. What is the acceptable range, if any, for the transfer price between the two divisions?

Problem 8 (Transfer Pricing)

Refer to the original data in Problem 7. Assume that the Pump Division needs 20,000 special high-pressure valves per year. The Valve Division's variable costs to manufacture and ship the special valve would be P20 per unit. To produce these special valves, the Valve Division would have to reduce its production and sales of regular valves from 100,000 units per year to 70,000 units per year.

Required:

As far as Valve Division is concerned, what is the lowest acceptable transfer price?

Problem 10 (Transfer Pricing Basic)

Jeju Company's Electrical Division produces a high-quality transformer. Sales and cost data on the transformer follows:

Selling price per unit on the outside market	40
Variable costs per unit	21
Fixed costs per unit (based on capacity)	9
Capacity in units	60,000

Jeju Company has a Motor Division that would like to begin purchasing this transformer from the Electrical Division. The Motor Division is currently purchasing 10,000 transformers each year from another company at a cost of P38 per transformer. Jeju Company evaluates its division managers on the basis of divisional profits.

Required:

1. Assume that the Electrical Division is now selling only 50,000 transformers each year to outside customers.
2. From the standpoint of the Electrical Division, what is the lowest acceptable transfer price for transformers sold to the Motor Division.
3. From the standpoint of the Motor Division, what is the highest acceptable transfer price for transformers acquired from the Electrical Division?
4. If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 10,000 transformers from the Electrical Division to the Motor Division? Why or why not?
5. From the standpoint of the whole company, should a transfer take place? Why or why not?

1. Assume that the Electrical Division is now selling all of the transformers it can produce to outside customers.
2. From the standpoint of the Electrical Division, what is the lowest acceptable transfer price for transformers sold to the Motor Division.
3. From the standpoint of the Motor Division, what is the highest acceptable transfer price for transformers acquired from the Electrical Division?
4. If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 10,000 transformers from the Electrical Division to the Motor Division? Why or why not?
5. From the standpoint of the whole company, should a transfer take place? Why or why not?