sier pricing policy and gives divisions Se prices. Can you predict what transfer price the manager of the Components Division will set? What should be the minimum transfer price for this part The maximum transfer price? Given the new transfer pricing policy. predict how this will affect the production decision Model TAC of the manager of the Small AC Division How many units of Part 4CM will the manager of the Small AC Division purchase, either internally or externally! Given the new transfer price set by the Components Division and your answer to Require went 3. how many units of 4CM will be sold externally? 4 Given blem 10.29 Transfer Pricing with Idle Capacity Inc., owns a number of food service companies. Two divisions are the Collee Dive and the Donut Shop Division. The Coffee Division purchases and roasts coffee beans For sale to supermarkets and specialty shops. The Donut Shop Division operates a chain of al shops where the donuts are made on the premises. Coffee is an important item for sale Tone with the donuts and, to date, has been purchased from the Coffee Division. Company policy permits each manager the freedom to decide whether or not to buy or sell internally. Fach divisional manager is evaluated on the basis of return on investment and residual income. . Hoween Trem Recently, an outside supplier has offered to sell coffee beans, roasted and ground, to the Donut Shop Division for $4.30 per pound. Since the current price paid to the Collee Divi- sion is $4.75 per pound, Ashleigh Tremont, the manager of the Donut Shop Division, was interested in the offer. However, before making the decision to switch to the outside sup- plier, she decided to approach Santigui Melendez, mananer of the Coffee Division, to see if he wanted to offer an even better price. If not, then Ashleigh would buy from the outside supplier. Upon receiving the information from Ashleigh about the outside offer, Santigui gathered the following information about the coffee: decided Direct materials Direct labor Variable overhead Fixed overhead* Total unit cost $0.95 0.45 0.72 1.53 $3.65 *Fixed overhead is based on S1,530,000/1,000,000 pounds. Selling price per pound Production capacity Internal sales $4.75 1,000,000 pounds 100,000 pounds Required: 1. Suppose that the Coffee Division is producing at capacity and can sell all that it produces to vulside customers. How should Santigui respond to Ashleigh's request for a lower transfer uation, and Transfer Pricing Chapter 10 Decentralization: Responsibility Accounting, Performance Evaluation, and 000 pounds. If no units are price? What will be the effect on firmwide profits? Compute the effect of this each division's profits. 2. Now, assume that the Coffee Division is currently selling 950,000 pounds. If no sold internally, total coffee sales will drop to 850,000 pounds. Suppose that Santigui to lower the transfer price from $4.75 and the Donut Division purchases from the ex supplier. Compute the effect on each division's profits and on the profits of the firma whole. 3. Refer to Requirement 2. What are the minimum and maximum transfer prices? Suppose that the transfer price is set at the maximum price less $1. Will the two divisions accept this transfer price? Compute the effect on the firm's profits and on each division's profits. 4. Suppose that the Coffee Division has operating assets of $2,000,000. Assume that the Coffee Division sells 850,000 pounds to outsiders and 100,000 pounds to the Donut Division at a price of $4.75 per pound. What is divisional ROI (rounded to four significant digits) based, on this situation? Now, refer to Requirement 3. What will divisional ROI (rounded to four significant digits) be if the transfer price of the maximum price less S1 is implemented! Ho will the change in ROI affect Santigui? What information has he gained as a resun transfer pricing negotiations? Problem 10.30 Transfer Pricing: Various Computations Corning Company has a decentralized cranion
