LESSON #17: TRANSFER PRICING HOMEWORK

ABC Company has 2 Profit CentersSeller and Buyer. Seller produces Intermediate Product X that Buyer needs for the production of Final Product Z.

Buyer currently purchases 1,000 units of Intermediate Product X for $15/unit on the open market.

Sellers Full Cost to manufacture Intermediate Product X for financial accounting consists of Direct Materials ($2/unit), Direct Labor ($3/unit), Variable Manufacturing Overhead ($5/unit), and Fixed Manufacturing Overhead ($2.50/unit) based on full capacity of 100,000 units). Seller sells Intermediate Product X to its regular customers at $19/unit.

QUESTION 1: If the seller has IDLE CAPACITY, what is the MAXIMUM TRANSFER PRICE that the buyer would pay?

QUESTION 2: If the seller has IDLE CAPACITY, what is the MINIMUM TRANSFER PRICE that the seller would accept?

QUESTION 3: If the seller has NO IDLE CAPACITY (i.e., FULL CAPACITY), what is the MAXIMUM TRANSFER PRICE that the buyer would pay?

QUESTION 4: If the seller has NO IDLE CAPACITY (i.e., FULL CAPACITY), what is the MINIMUM TRANSFER PRICE that the seller would accept?