Chapter 15, Problem 20E

Apply Transfer Pricing Rules

Best Practices, Inc., is a management consulting firm. Its Corporate Division advises private firms on the adoption and use of cost management systems. Government Division consults with state and local governments. Government Division has a client that is interested in implementing an activity-based costing system in its public works department. The division’s head approached the head of Corporate Division about using one of its associates. Corporate Division charges clients $600 per hour for associate services, the same rate other consulting companies charge. The Government Division head complained that it could hire its own associate at an estimated variable cost of $200 per hour, which is what Corporate pays its associates.

Required

1. a.      What is the minimum transfer price that Corporate Division should obtain for its services, assuming that it is operating at capacity?
2. b.      What is the maximum price that Government Division should pay?
3. c.       Would your answers in requirement (a) or (b) change if Corporate Division had idle capacity? If so, which answer would change, and what would the new amount be?