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Transfer Pricing: seminar solutions
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BEA2010 Managerial AccountingSeminar assignment 6: Transfer Pricing – Suggested solutions
Problem
(a)(i) The lowest acceptable transfer price from the perspective of Division A will
be equal to the variable cost as there is enough idle capacity, hence the
transfer price will be equal to $84.
(ii) Division B can buy a similar product from another supplier (i.e., external)
for $114. Hence, Division B would be unwilling to pay more than $114 per
camera.
(iii) From the standpoint of the entire company, the transfer should take place.
This is because the cost of the cameras transferred is $84 and the company
saves the $114 cost per camera purchased from the outside supplier.
(b)(i) Division A would demand a transfer price of at least $120 as each camera
transferred will displace a sale to an outside customer.
(ii) Division B would not be willing to pay more than $114 per camera.
(iii) From the standpoint of the entire company, the transfer should not take
place. This is because if Division A transfers a camera to Division B, the
company forgoes revenue of $120 and saves $114 (loss of $6).
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