UK Pumps is a multi-divisional firm that manufactures and installs chemical piping and pump systems. The Valve Division makes a single standardized valve. Two divisions, the Valve Division and the Installation Division, are currently involved in a transfer-pricing dispute. Last year, half of the Valve Division's output was sold to the Installation Division for £40 and the remaining half was sold to outsiders for £60. The existing transfer price of £40 per pump has been set through a negotiation process between the two divisions and also with the involvement of senior management. The Installation Division has received a bid from an outside valve manufacturer to supply it with an equivalent valve for £35 each. The manager of the Valve Division has argued that if it is forced to meet the external price of £35, it will lose money on internal sales. The operating data for last year for the Valve Division are as follows: Valve Division Operating Statement Last Year 266 To Installation Division To Outside 20,000 @ £40 £800,000 @ £30 (600,000) Sales 20,000 @ £60 £1,200,000 Variable costs (600,000) Fixed costs (135,000) (135,000) Gross margin £ 65,000 £ 465,000 Analyze the situation and recommend a course of action. What should the Installation Division managers do? What should the Valve Division managers do? In your opinion, what should UK Pumps' senior managers do?
UK Pumps is a multi-divisional firm that manufactures and installs chemical piping and pump systems. The Valve Division makes a single standardized valve. Two divisions, the Valve Division and the Installation Division, are currently involved in a transfer-pricing dispute. Last year, half of the Valve Division's output was sold to the Installation Division for £40 and the remaining half was sold to outsiders for £60. The existing transfer price of £40 per pump has been set through a negotiation process between the two divisions and also with the involvement of senior management. The Installation Division has received a bid from an outside valve manufacturer to supply it with an equivalent valve for £35 each. The manager of the Valve Division has argued that if it is forced to meet the external price of £35, it will lose money on internal sales. The operating data for last year for the Valve Division are as follows: Valve Division Operating Statement Last Year 266 To Installation Division To Outside 20,000 @ £40 £800,000 @ £30 (600,000) Sales 20,000 @ £60 £1,200,000 Variable costs (600,000) Fixed costs (135,000) (135,000) Gross margin £ 65,000 £ 465,000 Analyze the situation and recommend a course of action. What should the Installation Division managers do? What should the Valve Division managers do? In your opinion, what should UK Pumps' senior managers do?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:AIP 6.11 Transfer Price LO 6
UK Pumps is a multi-divisional firm that manufactures and installs chemical piping
and pump systems. The Valve Division makes a single standardized valve. Two
divisions, the Valve Division and the Installation Division, are currently involved in a
transfer-pricing dispute. Last year, half of the Valve Division's output was sold to the
Installation Division for £40 and the remaining half was sold to outsiders for £60.
The existing transfer price of £40 per pump has been set through a negotiation process
between the two divisions and also with the involvement of senior management. The
Installation Division has received a bid from an outside valve manufacturer to supply it
with an equivalent valve for £35 each.
The manager of the Valve Division has argued that if it is forced to meet the external
price of £35, it will lose money on internal sales.
The operating data for last year for the Valve Division are as follows:
Valve Division
Operating Statement Last Year
266
To Installation Division
To Outside
Sales
20,000 @ £40 £800,000
20,000 @ £60 £1,200,000
@ £30 (600,000)
(135,000)
Variable costs
(600,000)
(135,000)
£ 465,000
Fixed costs
Gross margin
£ 65,000
Analyze the situation and recommend a course of action. What should the Installation
Division managers do? What should the Valve Division managers do? In your opinion,
what should UK Pumps' senior managers do?
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