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Exam 22: Transfer Pricing

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Question 21

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Zeilinger Products, Inc., has a Screen Division that manufactures and sells a number of products, including a standard screen that could be used by another division in the company, the Home Security Division, in one of its products. Data concerning that screen appear below: The Home Security Division is currently purchasing 8,000 of these screens per year from an overseas supplier at a cost of $58 per screen. Assume that the Valve Division is selling all of the valves it can produce to outside customers. From the standpoint of the Valve Division, what is the lost contribution margin if the valves are transferred internally rather than sold to outside customers?

A) $88,000
B) $392,000
C) $1,480,000
D) $296,000

E) All of the above
F) None of the above

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Question 22

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Germano Products, Inc., has a Pump Division that manufactures and sells a number of products, including a standard pump that could be used by another division in the company, the Pool Products Division, in one of its products. Data concerning that pump appear below: The Pool Products Division is currently purchasing 10,000 of these pumps per year from an overseas supplier at a cost of $94 per pump. Assume that the Pump Division is selling all of the pumps it can produce to outside customers. Does there exist a transfer price that would make both the Pump and Pool Products Division financially better off than if the Pool Products Division were to continue buying its pumps from the outside supplier?

A) Yes, both divisions are always better off regardless of whether the selling division has enough idle capacity to handle all of the buying division's needs.
B) Yes, the minimum transfer price that the selling division should be willing to accept is less than the maximum transfer price that the buying division should be willing to accept.
C) The answer cannot be determined from the information that has been provided.
D) No, the minimum transfer price that the selling division should be willing to accept exceeds the maximum transfer price that the buying division should be willing to accept.

E) A) and D)
F) B) and C)

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Question 23

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Nanke Products, Inc., has a Sensor Division that manufactures and sells a number of products, including a standard sensor that could be used by another division in the company, the Safety Products Division, in one of its products. Data concerning that sensor appear below: The Safety Products Division is currently purchasing 3,000 of these sensors per year from an overseas supplier at a cost of $59 per sensor. Assume that the Sensor Division is selling all of the sensors it can produce to outside customers. What should be the minimum acceptable transfer price for the sensors from the standpoint of the Sensor Division?

Fyodor Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers. The company's Machine Division has asked the Parts Division to provide it with 8,000 special parts each year. The special parts would require $19.00 per unit in variable production costs. The Machine Division has a bid from an outside supplier for the special parts at $27.00 per unit. In order to have time and space to produce the special part, the Parts Division would have to cut back production of another part-the QR4 that it presently is producing. The QR4 sells for $34.00 per unit, and requires $18.00 per unit in variable production costs. Packaging and shipping costs of the QR4 are $2.00 per unit. Packaging and shipping costs for the new special part would be only $0.50 per unit. The Parts Division is now producing and selling 40,000 units of the QR4 each year. Production and sales of the QR4 would drop by 5% if the new special part is produced for the Machine Division. Required: a. What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 8,000 special parts per year from the Parts Division to the Machine Division? b. Is it in the best interests of Fyodor Corporation for this transfer to take place? Explain.

Vandermeer Products, Inc., has a Antennae Division that manufactures and sells a number of products, including a standard antennae. Data concerning that antennae appear below: The company has a Aircraft Products Division that could use this antennae in one of its products. The Aircraft Products Division is currently purchasing 11,000 of these antennaes per year from an overseas supplier at a cost of $88 per antennae. Required: a. Assume that the Antennae Division is selling all of the antennaes it can produce to outside customers. What is the acceptable range, if any, for the transfer price between the two divisions? b. Assume again that the Antennae Division is selling all of the antennaes it can produce to outside customers. Also assume that $1 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. What is the acceptable range, if any, for the transfer price between the two divisions?

Two of the decentralized divisions of Gamberi Electronics Corporation are the Plastics Division and the Components Division. The Plastics Division sells molded parts to both the Components Division and to customers outside the corporation. Assume that the Plastics Division is currently operating with idle capacity. Also assume that the Components Division wants to purchase from Plastics all of the additional parts that could be made with this idle capacity. In order to increase its current level of profitability, the Plastics Division should accept any transfer price on these additional parts that is above the:

If transfer prices are to be based on cost, then the costs should be actual costs rather than standard costs.

Zumsteg Products, Inc., has a Pump Division that manufactures and sells a number of products, including a standard pump. Data concerning that pump appear below: The company has a Pool Products Division that could use this pump in one of its products. The Pool Products Division is currently purchasing 7,000 of these pumps per year from an overseas supplier at a cost of $81 per pump. Required: Assume that the Pump Division has enough idle capacity to handle all of the Pool Products Division's needs. What is the acceptable range, if any, for the transfer price between the two divisions?

From the buying division's perspective, when a transferred item can be purchased from an outside supplier, the price charged by the outside supplier represents an upper bound on the charge that should be made on transfers between the selling and buying divisions.

Setting transfer prices at full cost can lead to bad decisions because, among other reasons, full cost does not take into account opportunity costs.

If the lowest acceptable transfer price from the viewpoint of the selling division is $75 and the opportunity cost per unit on outside sales is $24, then the variable cost per unit must be:

Prejean Products, Inc., has a Relay Division that manufactures and sells a number of products, including a standard relay. Data concerning that relay appear below: The company has a Electronics Division that could use this relay in one of its products. The Electronics Division is currently purchasing 9,000 of these relays per year from an overseas supplier at a cost of $74 per relay. Required: a. Assume that the Relay Division has enough idle capacity to handle all of the Electronics Division's needs. What is the acceptable range, if any, for the transfer price between the two divisions? b. Assume that the Relay Division is selling all of the relays it can produce to outside customers. Also assume that $13 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. What is the acceptable range, if any, for the transfer price between the two divisions?

Division E of Harveq Company has the capacity for making 6,000 motors per month and regularly sells 5,400 motors each month to outside customers at a contribution margin of $54 per motor. The variable cost per motor is $41. Division F of Harveq Company would like to obtain 900 motors each month from Division E. What should be the lowest acceptable transfer price from the perspective of Division E?

Ebbs Products, Inc., has a Motor Division that manufactures and sells a number of products, including a standard motor. Data concerning that motor appear below: The Automotive Division of Ebbs Products, Inc needs 9,000 special heavy-duty motors per year. The Motor Division's variable cost to manufacture and ship this special motor would be $46 per unit. Because these special motors require more manufacturing resources than the standard motor, the Motor Division would have to reduce its production and sales of standard motors to outside customers from 86,000 units per year to 72,500 units per year. What is the total contribution margin on sales to outside customers that the Motor Division would give up if it were to make the special motors for the Automotive Division?

Starcic Products, Inc., has a Connector Division that manufactures and sells a number of products, including a standard connector. Data concerning that connector appear below: The company has a Transmission Division that needs 6,000 special heavy-duty connectors per year. The Connector Division's variable cost to manufacture and ship this special connector would be $62 per unit. Making these special connectors would require more manufacturing resources. Therefore, the Connector Division would have to reduce its production and sales of regular connectors to outside customers from 45,000 units per year to 38,400 units per year. Required: As far as the Connector Division is concerned, what is the lowest acceptable transfer price for the special connectors?

The Parts Division of Nydron Corporation makes Part Y6P, which it sells to outside companies for $17.00 per unit. According to the cost accounting system, the costs of making one unit of Part Y6P consist of $7.00 for direct materials, $3.00 for direct labor, $4.50 for variable manufacturing overhead, and $1.20 for fixed manufacturing overhead. The Parts Division has enough idle capacity to make 1,000 units of Part Y6P each month. The Assembly Division of Nydron Corporation can use Part Y6P in one of its products. At present, the Assembly Division is purchasing an equivalent part from an outside supplier for $16.85 per unit. The Assembly Division needs 2,000 units of the part each month. It has been suggested that the Assembly Division buy Part Y6P from the Parts Division instead of buying the equivalent part from the outside supplier. The transfer price for this transaction would lie within what limits?

Bacot Products, Inc., has a Valve Division that manufactures and sells a number of products, including a standard valve that could be used by another division in the company, the Pump Division, in one of its products. Data concerning that valve appear below: The Pump Division is currently purchasing 8,000 of these valves per year from an overseas supplier at a cost of $47 per valve. What is the maximum price that the Pump Division should be willing to pay for valves transferred from the Valve Division?

Division P of the Nyers Company makes a part that can either be sold to outside customers or transferred internally to Division Q for further processing. Annual data relating to this part are as follows: Division Q of the Nyers Company requires 15,000 units per year and is currently paying an outside supplier $33 per unit. Consider each part below independently. If outside customers demand 70,000 units, then according to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division for each of the 15,000 units needed by Q?

Royal Products, Inc., has a Connector Division that manufactures and sells a number of products, including a standard connector that could be used by another division in the company, the Transmission Division, in one of its products. Data concerning that connector appear below: The Transmission Division is currently purchasing 6,000 of these connectors per year from an overseas supplier at a cost of $65 per connector. What is the maximum price that the Transmission Division should be willing to pay for connectors transferred from the Connector Division?

Fregozo Products, Inc., has a Connector Division that manufactures and sells a number of products, including a standard connector that could be used by another division in the company, the Transmission Division, in one of its products. Data concerning that connector appear below: The Transmission Division is currently purchasing 8,000 of these connectors per year from an overseas supplier at a cost of $45 per connector. Assume that the Connector Division is selling all of the connectors it can produce to outside customers. What should be the minimum acceptable transfer price for the connectors from the standpoint of the Connector Division?