Techno Inc. has two divisions: Auxiliary Components and Audio Systems. Divisional managersare encouraged to maximize ROI and EVA. Managers are essentially free to determine whethergoods will be transferred internally and what the internal transfer prices will be. Headquartershas directed that all internal prices be expressed on a full cost-plus basis. The markup in the fullcost pricing arrangement, however, is left to the discretion of the divisional managers. Recently,the two divisional managers met to discuss a pricing agreement for a subwoofer that would besold with a personal computer system. Production of the subwoofers is at capacity. Subwooferscan be sold for $31 to outside customers. The Audio Systems Division can also buy the subwoofer from external sources for the same price; however, the manager of this division is hoping toobtain a price concession by buying internally. The full cost of manufacturing the subwoofer is$20. If the manager of the Auxiliary Components Division sells the subwoofer internally, $5 ofselling and distribution costs can be avoided. The volume of business would be 250,000 unitsper year, which is well within the capacity of the producing division.After some discussion, the two managers agreed on a full cost-plus pricing scheme thatwould be reviewed annually. Any increase in the outside selling price would be added to thetransfer price by simply increasing the markup by an appropriate amount. Any major changes inthe factors that led to the agreement could initiate a new round of negotiation. Otherwise, thefull cost-plus arrangement would continue in force for subsequent years.Required:1. Calculate the minimum and maximum transfer prices.2. Assume that the transfer price agreed on between the two managers is halfway betweenthe minimum and maximum transfer prices. Calculate this transfer price. What markupover full cost is implied by this transfer price?3. Refer to Requirement 2. Assume that in the following year, the outside price ofsubwoofers increases to $32. What is the new full cost-plus transfer price?4. CONCEPTUAL CONNECTION Assume that 2 years after the initial agreement, themarket for subwoofers has softened considerably, causing excess capacity for the AuxiliaryComponents Division. Would you expect a renegotiation of the full cost-plus pricingarrangement for the coming year? Explain.
Techno Inc. has two divisions: Auxiliary Components and Audio Systems. Divisional managers
are encouraged to maximize
goods will be transferred internally and what the internal transfer prices will be. Headquarters
has directed that all internal prices be expressed on a full cost-plus basis. The markup in the full
cost pricing arrangement, however, is left to the discretion of the divisional managers. Recently,
the two divisional managers met to discuss a pricing agreement for a subwoofer that would be
sold with a personal computer system. Production of the subwoofers is at capacity. Subwoofers
can be sold for $31 to outside customers. The Audio Systems Division can also buy the subwoofer from external sources for the same price; however, the manager of this division is hoping to
obtain a price concession by buying internally. The full cost of manufacturing the subwoofer is
$20. If the manager of the Auxiliary Components Division sells the subwoofer internally, $5 of
selling and distribution costs can be avoided. The volume of business would be 250,000 units
per year, which is well within the capacity of the producing division.
After some discussion, the two managers agreed on a full cost-plus pricing scheme that
would be reviewed annually. Any increase in the outside selling price would be added to the
transfer price by simply increasing the markup by an appropriate amount. Any major changes in
the factors that led to the agreement could initiate a new round of negotiation. Otherwise, the
full cost-plus arrangement would continue in force for subsequent years.
Required:
1. Calculate the minimum and maximum transfer prices.
2. Assume that the transfer price agreed on between the two managers is halfway between
the minimum and maximum transfer prices. Calculate this transfer price. What markup
over full cost is implied by this transfer price?
3. Refer to Requirement 2. Assume that in the following year, the outside price of
subwoofers increases to $32. What is the new full cost-plus transfer price?
4. CONCEPTUAL CONNECTION Assume that 2 years after the initial agreement, the
market for subwoofers has softened considerably, causing excess capacity for the Auxiliary
Components Division. Would you expect a renegotiation of the full cost-plus pricing
arrangement for the coming year? Explain.
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