Chapter 11, Problem 46P

1.

To determine

Compute the minimum transfer price and maximum transfer price.

Answer to Problem 46P

The minimum and maximum transfer price will be $26 and $31 respectively.

Explanation of Solution

Transfer Price:

The amount of price charged by the selling department for a component to the purchasing department of a similar company is known as transfer price.

The maximum transfer price will be $31 per unit because the subwoofers can be sold at this price to the customers. Use the following formula to calculate the minimum transfer price:

$\text{Minimum transfer price}=\left(\begin{array}{l}\text{Maximum transfer price}\\ -\text{Selling and distribution cost}\end{array}\right)$

Substitute $31 for maximum transfer price and $5 for selling and distribution cost in the above formula.

$\begin{array}{c}\text{Minimum transfer price}=\$31-\$5\\ =\$26\end{array}$

Therefore, the minimum transfer price will be $26 per unit.

2.

To determine

Calculate the transfer price that can be negotiated. Also, calculate the markup that can be applied to this transfer price.

Answer to Problem 46P

The transfer price that can be negotiated is $28.5 per unit. The markup percentage is 0.425 or 42.5%.

Explanation of Solution

Use the following formula to calculate the transfer price that can be negotiated:

$\text{Transfer price}=\frac{\left(\text{Minimum transfer price}+\text{Maximum transfer price}\right)}{2}$

Substitute $26 for a minimum transfer price and $31 for a maximum transfer price in the above formula.

$\begin{array}{c}\text{Transfer price}=\frac{\left(\$26+\$31\right)}{2}\\ =\frac{\$57}{2}\\ =\$28.5\end{array}$

Therefore, the transfer price that can be negotiated is $28.5 per unit.

Use the following formula to calculate the markup percentage:

$\text{Markup percentage}=\frac{\left(\text{Negotiated transfer price}-\text{Full cost of manufacturing}\right)}{\text{Full cost of manufacturing}}$

Substitute $28.50 for a minimum transfer price and $20 for maximum transfer price in the above formula.

$\begin{array}{c}\text{Markup percentage}=\frac{\left(\$28.50-\$20\right)}{\$20}\\ =\frac{\$8.50}{\$20}\\ =0.425\end{array}$

Therefore, the markup percentage is 0.425 or 42.5%.

3.

To determine

Calculate the new full cost-plus transfer price.

Answer to Problem 46P

The full cost-plus transfer price is $43.51 per unit.

Explanation of Solution

Use the following formula to calculate the new full cost-plus transfer price:

$\begin{array}{c}\text{Full cost-plus transfer price}={\text{Negotiated transfer price}}^{\text{1}}+\\ \left(\text{Negotiated transfer}\times {\text{Markup percentge}}^{\text{2}}\right)\end{array}$

Substitute $29.50 for negotiated transfer price and 47.5% for markup percentage in the above formula.

$\begin{array}{c}\text{Full cost-plus transfer price}=\$29.50+\left(\$29.50\times 47.5\%\right)\\ =\$29.50+14.01\\ =\$43.51\end{array}$

Therefore, the full cost-plus transfer price is $43.51 per unit.

Working Notes:

1. Calculate the minimum transfer price in order to calculate the negotiated transfer price:

$\begin{array}{c}\text{Minimum transfer price}=\left(\begin{array}{l}\text{Maximum transfer price}\\ -\text{Selling and distribution cost}\end{array}\right)\\ =\$32-\$5\\ =\$27\end{array}$

The minimum transfer price is $27 per unit.

Calculation of negotiated transfer price:

$\begin{array}{c}\text{Negotiated transfer price}=\frac{\left(\begin{array}{l}\text{Minimum transfer price}\\ +\text{Maximum transfer price}\end{array}\right)}{2}\\ =\frac{\left(\$32+\$27\right)}{2}\\ =\frac{\$59}{2}\\ =\$29.50\end{array}$

Hence, the negotiated transfer price is $29.50 per unit.

2. Calculation of markup percentage:

$\begin{array}{c}\text{Markup percentage}=\frac{\left(\text{Negotiated transfer price}-\text{Full cost of manufacturing}\right)}{\text{Full cost of manufacturing}}\\ =\frac{\left(\$29.50-\$20\right)}{\$20}\\ =0.475\end{array}$

Hence, the markup percentage is 0.475 or 47.5%.

4.

To determine

Describe whether the divisions would renegotiate on the full cost-plus pricing arrangements.

Explanation of Solution

As the markup percentage is too high, the divisions would re-negotiate the transfer prices. This is because the purchasing division would desire to purchase the part at lower prices or may purchase from another supplier if the selling division does not provide the appropriate price. The Component division has to decrease the per unit price of the part.