Transfer Pricing Green World Inc. is a nursery products firm. It has three divisions that grow and sell plants: the Western Division, the Southern Division, and the Canadian Division. Recently, the Southern Division of Green World acquired a plastics factory that manufactures green plastic pots. These pots can be sold both externally and internally. Company policy permits each manager to decide whether to buy or sell internally. Each divisional manager is evaluated on the basis of ROI and EVA. The Western Division had bought its plastic pots in lots of 100 from a variety of vendors. The average price paid was $75 per box of 100 pots. However, the acquisition made Rosario Sanchez-Ruiz, manager of the Western Division, wonder whether or not a more favorable price could be arranged. She decided to approach Lorne Matthews, manager of the Southern Division, to see if he wanted to offer a better price for an internal transfer. She suggested a transfer of 3,500 boxes at $70 per box. Lorne gathered the following information regarding the cost of a box of 100 pots: Required: 1. Conceptual Connection: Suppose that the plastics factory is producing at capacity and can sell all that it produces to outside customers. How should Lorne respond to Rosario’s request for a lower transfer price? 2. Conceptual Connection: Now assume that the plastics factory is currently selling 16,000 boxes. What are the minimum and maximum transfer prices? Should Lorne consider the transfer at $70 per box? 3. Conceptual Connection: Suppose that GreenWorld’s policy is that all transfer prices be set at full cost plus 20 percent. Would the transfer take place? Why or why not?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question

Transfer Pricing Green World Inc. is a nursery products firm. It has three divisions that grow and sell plants: the Western Division, the Southern Division, and the Canadian Division. Recently, the Southern Division of Green World acquired a plastics factory that manufactures green plastic pots. These pots can be sold both externally and internally. Company policy permits each manager to decide whether to buy or sell internally. Each divisional manager is evaluated on the basis of ROI and EVA. The Western Division had bought its plastic pots in lots of 100 from a variety of vendors. The average price paid was $75 per box of 100 pots. However, the acquisition made Rosario Sanchez-Ruiz, manager of the Western Division, wonder whether or not a more favorable price could be arranged. She decided to approach Lorne Matthews, manager of the Southern Division, to see if he wanted to offer a better price for an internal transfer. She suggested a transfer of 3,500 boxes at $70 per box. Lorne gathered the following information regarding the cost of a box of 100 pots:

Required:

1. Conceptual Connection: Suppose that the plastics factory is producing at capacity and can sell all that it produces to outside customers. How should Lorne respond to Rosario’s request for a lower transfer price?

2. Conceptual Connection: Now assume that the plastics factory is currently selling 16,000 boxes. What are the minimum and maximum transfer prices? Should Lorne consider the transfer at $70 per box?

3. Conceptual Connection: Suppose that GreenWorld’s policy is that all transfer prices be set at full cost plus 20 percent. Would the transfer take place? Why or why not?

 

Expert Solution
steps

Step by step

Solved in 4 steps

Blurred answer
Knowledge Booster
Transfer Pricing
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education