Exercise 8 (Transfer Pricing Situations) In each of the cases below, assume that Division A has 'a product that can be sold either to outside customers or to Division B of the same company for use in its production process. The managers of the divisions are evaluated based on their divisional profits. Case 1 2 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). 100,000 100,000 P50 100,000 80,000 Р35 P20 Р30 P 8 Division Y: Number of units needed for production... Purchase price per unit now being paid to an outside supplier.. 20,000 20,000 P47 Р34 Required: 1. Refer to the data in case A above. Assume that P2 per unit in variable selling costs can be avoided on intracompany sales. If the managers are free to negotiate and make decisions on their own, will a transfer take place? If so, within what range will the transfer price fall? Explain. 2. Refer to the data in case B above. In this case, there will be no reduction in variable selling costs on intracompany sales. If the managers are free to negotiate and make decisions on their own, will a transfer take place? If so, within what range will the transfer price fall? Explain.
Exercise 8 (Transfer Pricing Situations) In each of the cases below, assume that Division A has 'a product that can be sold either to outside customers or to Division B of the same company for use in its production process. The managers of the divisions are evaluated based on their divisional profits. Case 1 2 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). 100,000 100,000 P50 100,000 80,000 Р35 P20 Р30 P 8 Division Y: Number of units needed for production... Purchase price per unit now being paid to an outside supplier.. 20,000 20,000 P47 Р34 Required: 1. Refer to the data in case A above. Assume that P2 per unit in variable selling costs can be avoided on intracompany sales. If the managers are free to negotiate and make decisions on their own, will a transfer take place? If so, within what range will the transfer price fall? Explain. 2. Refer to the data in case B above. In this case, there will be no reduction in variable selling costs on intracompany sales. If the managers are free to negotiate and make decisions on their own, will a transfer take place? If so, within what range will the transfer price fall? Explain.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Exercise 8 (Transfer Pricing Situations)
In each of the cases below, assume that Division A has 'a product that can be
sold either to outside customers or to Division B of the same company for use
in its production process. The managers of the divisions are evaluated based
on their divisional profits.
Case
1
2
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).
100,000
100,000
P50
P30
100,000
80,000
P35
P20
P 8
Division Y:
Number of units needed for production...
Purchase price per unit now being paid to an outside
supplier..
20,000
20,000
P47
Р34
Required:
1. Refer to the data in case A above. Assume that P2 per unit in variable
selling costs can be avoided on intracompany sales. If the managers are
free to negotiate and make decisions on their own, will a transfer take
place? If so, within what range will the transfer price fall? Explain.
2. Refer to the data in case B above. In this case, there will be no reduction
in variable selling costs on intracompany sales. If the managers are free
to negotiate and make decisions on their own, will a transfer take place?
If so, within what range will the transfer price fall? Explain.
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