MA Tutorial 10 - Transfer Pricing PDF

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7/24/2017 Assignment Print View   Score: 100/100 Points 100 % [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 produc...

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7/24/2017

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Score:

100/100

Points

100

%

[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.       Division X:         Capacity in units         Number of units being sold to outside customers         Selling price per unit to outside customers         Variable costs per unit         Fixed costs per unit (based on capacity)   Division Y:         Number of units needed for production         Purchase price per unit now being paid to an           outside supplier

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Case A

B

  200,000     200,000     $90     $70     $13       40,000    

  200,000     160,000     $75     $60     $8       40,000    

$86    

$74    

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 1.

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Award: 10 out of 10.00 points

 

 

Requirement 1: (a) Refer to the data in case A above. Assume in this case that $3 per unit in variable selling costs can be avoided on intracompany sales. Determine the transfer price of the selling division. (Omit the "$" sign in your response.) $ 87

Transfer price

 

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

 

No

   

References Worksheet

Learning Objective: 13-05 (Appendix 13A) Determine the range, if any, within which a negotiated transfer price should fall.

 

Requirement 1: (a) Refer to the data in case A above. Assume in this case that $3 per unit in variable selling costs can be avoided on intracompany sales. Determine the transfer price of the selling division. (Omit the "$" sign in your response.) Transfer price

$

87

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

 

No

    Explanation: 1: The lowest acceptable transfer price from the perspective of the selling division is given by the following formula: Transfer price ≥

Variable cost per unit +

Total contribution margin on lost sales Number of units transferred

There is no idle capacity, so each of the 40,000 units transferred from Division X to Division Y reduces sales to outsiders by one unit. The contribution margin per unit on outside sales is $20 ( = $90 – $70). Transfer price ≥

($70 – $3) +

$20 × 40,000 40,000

= $67 + $20 = $87 http://ezto.mheducation.com/hm.tpx?todo=printview

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The buying division, Division Y, can buy a similar unit from an outside supplier for $86. Therefore, Division Y would be unwilling to pay more than $86 per unit. Transfer price ≤

Cost of buying from outside supplier = $86

The requirements of the two divisions are incompatible and no transfer will take place.

 

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Award: 10 out of 10.00 points

 

 

Requirement 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. (Omit the "$" sign in your response.) $ 60

Transfer price

 

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

 

Yes

(c) What is the range of transfer price the manager's of both divisions should agree? (Omit the "$" sign in your response.) From $ 60

to $ 74

  References Worksheet

Learning Objective: 13-05 (Appendix 13A) Determine the range, if any, within which a negotiated transfer price should fall.

 

Requirement 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. (Omit the "$" sign in your response.) Transfer price

$

60

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

 

Yes (c) What is the range of transfer price the manager's of both divisions should agree? (Omit the "$" sign in your response.) From $

60 to $

74

  Explanation: In this case, Division X has enough idle capacity to satisfy Division Y's demand. Therefore, there are no lost sales and the lowest acceptable price as far as the selling division is concerned is the variable cost of $60 per unit.

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Transfer price ≥ $60 +

$0 40,000

= $60

The buying division, Division Y, can buy a similar unit from an outside supplier for $74. Therefore, Division Y would be unwilling to pay more than $74 per unit. Transfer price ≤ Cost of buying from outside supplier = $74 In this case, the requirements of the two divisions are compatible and a transfer hopefully will take place at a transfer price within the range: $60 ≤ Transfer price ≤ $74

 

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 3.

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Award: 30 out of 30.00 points

 

 

Sako Company's Audio Division produces a speaker that is used by manufacturers of various audio products. Sales and cost data on the speaker follow: Selling price per unit on the intermediate market Variable costs per unit Fixed costs per unit (based on capacity) Capacity in units

$60 $42 $8 25,000

Sako Company has a Hi-Fi Division that could use this speaker in one of its products. The Hi-Fi Division will need 5,000 speakers per year. It has received a quote of $57 per speaker from another manufacturer. Sako Company evaluates division managers on the basis of divisional profits.

 

Requirement 1: Assume that the Audio Division is now selling only 20,000 speakers per year to outside customers.

 

(a) From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division? (Omit the "$" sign in your response.) $42

Transfer price

(b) What is the range of transfer price the manager's of both divisions should agree? (Omit the "$" sign in your response.) From $ 42

to $ 57

(c) If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 5,000 speakers from the Audio Division to the Hi-Fi Division?

Yes (d) From the standpoint of the entire company, should the transfer take place?

Transfer should take place Requirement 2: Assume that the Audio Division is selling all of the speakers it can produce to outside customers.

 

(a) From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division? (Omit the "$" sign in your response.) Transfer price

$60

(b) From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division? (Omit the "$" sign in your response.) Transfer price

$57

(c) If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 5,000 speakers from the Audio Division to the Hi-Fi Division?

 

No

(d) From the standpoint of the entire company, should a transfer take place?

 

Transfer should not take place

 

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References Worksheet

Learning Objective: 13-05 (Appendix 13A) Determine the range, if any, within which a negotiated transfer price should fall.

 

Sako Company's Audio Division produces a speaker that is used by manufacturers of various audio products. Sales and cost data on the speaker follow: Selling price per unit on the intermediate market Variable costs per unit Fixed costs per unit (based on capacity) Capacity in units

$60 $42 $8 25,000

Sako Company has a Hi-Fi Division that could use this speaker in one of its products. The Hi-Fi Division will need 5,000 speakers per year. It has received a quote of $57 per speaker from another manufacturer. Sako Company evaluates division managers on the basis of divisional profits.

 

Requirement 1: Assume that the Audio Division is now selling only 20,000 speakers per year to outside customers.

 

(a) From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division? (Omit the "$" sign in your response.) Transfer price

$

42

(b) What is the range of transfer price the manager's of both divisions should agree? (Omit the "$" sign in your response.) From $

42 to $

57

(c) If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 5,000 speakers from the Audio Division to the Hi-Fi Division? Yes (d) From the standpoint of the entire company, should the transfer take place? Transfer should take place Requirement 2: Assume that the Audio Division is selling all of the speakers it can produce to outside customers.

 

(a) From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division? (Omit the "$" sign in your response.) Transfer price

$

60

(b) From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division? (Omit the "$" sign in your response.) Transfer price

$

57

(c) If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 5,000 speakers from the Audio Division to the Hi-Fi Division? http://ezto.mheducation.com/hm.tpx?todo=printview

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  No (d) From the standpoint of the entire company, should a transfer take place?

 

Transfer should not take place

  Explanation: 1(a): The lowest acceptable transfer price from the perspective of the selling division is given by the following formula: Transfer price ≥

Variable cost per unit +

Total contribution margin on lost sales Number of units transferred

Because there is enough idle capacity to fill the entire order from the Hi-Fi Division, no outside sales are lost. And because the variable cost per unit is $42, the lowest acceptable transfer price as far as the selling division is concerned is also $42. Transfer price ≥ $42 +

$0 5,000

= $42

1(b): The Hi-Fi division can buy a similar speaker from an outside supplier for $57. Therefore, the Hi-Fi Division would be unwilling to pay more than $57 per speaker. Transfer price ≤ Cost of buying from outside supplier = $57 Combining the requirements of both the selling division and the buying division, the acceptable range of transfer prices in this situation is: $42 ≥ Transfer price ≥ $57

1(c): Assuming that the managers understand their own businesses and that they are cooperative, they should be able to agree on a transfer price within this range and the transfer should take place.

1(d): From the standpoint of the entire company, the transfer should take place. The cost of the speakers transferred is only $42 and the company saves the $57 cost of the speakers purchased from the outside supplier.

2(a): Each of the 5,000 units transferred to the Hi-Fi Division must displace a sale to an outsider at a price of $60. Therefore, the selling division would demand a transfer price of at least $60. This can also be computed using the formula for the lowest acceptable transfer price as follows: ($60 – $42) × 5,000 5,000 = $42 + ($60 – $42) = $60

Transfer price ≥ $42 +

2(b): As before, the Hi-Fi Division would be unwilling to pay more than $57 per speaker.

2(c): The requirements of the selling and buying divisions in this instance are incompatible. The selling division must have a price of at least $60 whereas the buying division will not pay more than $57. An agreement to transfer the speakers is extremely unlikely.

2(d): From the standpoint of the entire company, the transfer should not take place. By transferring a speaker internally, the company gives up revenue of $60 and saves $57, for a loss of $3.

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 4.

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Award: 10 out of 10.00 points

 

 

Alpha and Beta are divisions within the same company. The managers of both divisions are evaluated based on their own division's return on investment (ROI). Assume the following information relative to the two divisions: Case 1 2 3 4 Alpha Division: Capacity in units 80,000 400,000 150,000 300,000 Number of units now being sold to outside customers 80,000 400,000 100,000 300,000 Selling price per unit to outside customers $30 $90 $75 $50 Variable costs per unit $18 $65 $40 $26 Fixed costs per unit (based on capacity) $6 $15 $20 $9 Beta Division: Number of units needed annually 5,000 30,000 20,000 120,000 Purchase price now being paid to an outside supplier $27 $89 $75* — * Before any purchase discount. Managers are free to decide if they will participate in any internal transfers. All transfer prices are negotiated. Requirement 1: Refer to case 1 shown above. Alpha Division can avoid $2 per unit in commissions on any sales to Beta Division. (a)What is the minimum transfer price for Alpha Division? (Omit the "$" sign in your response.) Minimum transfer price $28 (b)What is the maximum transfer price for Beta Division? (Omit the "$" sign in your response.) Maximum transfer price $27 (c)Will the managers agree to a transfer?

No Requirement 2 Refer to case 2 shown above. A study indicates that Alpha Division can avoid $5 per unit in shipping costs on any sales to Beta Division. (a)What is the minimum transfer price for Alpha Division? (Omit the "$" sign in your response.) Minimum transfer price $85 (b)What is the maximum transfer price for Beta Division? (Omit the "$" sign in your response.) Maximum transfer price $89 (c)Would you expect any disagreement between the two divisional managers over what the transfer price should be? Yes

       

(d)Assume that Alpha Division offers to sell 30,000 units to Beta Division for $88 per unit and that Beta Division refuses this price. What will be the loss in potential profits for the company as a whole? (Omit the "$" sign in your response.) Loss in potential profits to the company $120,000 Requirement 3: Refer to case 3 shown above. Assume that Beta Division is now receiving a 8% price discount from the outside supplier. (a)What is the minimum transfer price for Alpha Division? (Omit the "$" sign in your response.) Minimum transfer price $40 (b)What is the range of transfer price the manager's of both divisions should agree? (Omit the "$" sign in your response.) From to $40 $ 69 (c)Will the managers agree to a transfer? Yes

    

(d)Assume that Beta Division offers to purchase 20,000 units from Alpha Division at $60 per unit. If Alpha http://ezto.mheducation.com/hm.tpx?todo=printview

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Division accepts this price, would you expect its ROI to increase, decrease, or remain unchanged? Alpha Division's ROI Increase Requirement 4: Refer to case 4 shown above. Assume that Beta Division wants Alpha Division to provide it with 120,000 units of a different product from the one that Alpha Division is now producing. The new product would require $21 per unit in variable costs and would require that Alpha Division cut back production of its present product by 45,000 units annually. What is the lowest acceptable transfer price from Alpha Division's perspective? (Round your answer to 2 decimal places. Omit the "$" sign in your response.) Lowest acceptable transfer price

$30

  References Worksheet

Learning Objective: 13-05 (Appendix 13A) Determine the range, if any, within which a negotiated transfer price should fall.

 

Alpha and Beta are divisions within the same company. The managers of both divisions are evaluated based on their own division's return on investment (ROI). Assume the following information relative to the two divisions: Case 1 2 3 4 Alpha Division: Capacity in units 80,000 400,000 150,000 300,000 Number of units now being sold to outside customers 80,000 400,000 100,000 300,000 Selling price per unit to outside customers $30 $90 $75 $50 Variable costs per unit $18 $65 $40 $26 Fixed costs per unit (based on capacity) $6 $15 $20 $9 Beta Division: Number of units needed annually 5,000 30,000 20,000 120,000 Purchase price now being paid to an outside supplier $27 $89 $75* — * Before any purchase discount. Managers are free to decide if they will participate in any internal transfers. All transfer prices are negotiated. Requirement 1: Refer to case 1 shown above. Alpha Division can avoid $2 per unit in commissions on any sales to Beta Division. (a)What is the minimum transfer price for Alpha Division? (Omit the "$" sign in your response.) Minimum transfer price $ 28 (b)What is the maximum transfer price for Beta Division? (Omit the "$" sign in your response.) Maximum transfer price $ 27 (c)Will the managers agree to a transfer? No Requirement 2 Refer to case 2 shown above. A study indicates that Alpha Division can avoid $5 per unit in shipping costs http://ezto.mheducation.com/hm.tpx?todo=printview

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on any sales to Beta Division. (a)What is the minimum transfer price for Alpha Division? (Omit the "$" sign in your response.) Minimum transfer price $ 85 (b)What is the maximum transfer price for Beta Division? (Omit the "$" sign in your response.) Maximum transfer price $ 89 (c)Would you expect any disagreement between the two divisional managers over what the transfer price should be? Yes

       

(d)Assume that Alpha Division offers to sell 30,000 units to Beta Division for $88 per unit and that Beta Division refuses this price. What will be the loss in potential profits for the company as a whole? (Omit the "$" sign in your response.) Loss in potential profits to the company $ 120,000 Requirement 3: Refer to case 3 shown above. Assume that Beta Division is now receiving a 8% price discount from...