Chapter 15, Problem 27E

Transfer Pricing Policies: Ethical Issues

Refer to the data in Exercise 15–20. Suppose that Government Division will charge the client interested in implementing an activity-based costing system by the hour based on cost plus a fixed fee, where the cost is primarily the consultant’s hourly pay. Assume also that Government Division cannot hire additional consultants. That is, if it is to do this job, it will need to use a consultant from Corporate Division.

Required

1. a.      What is the minimum transfer price that Corporate Division should obtain for its services, assuming that it is operating at capacity? Would this be an ethical price to charge the Government client? Explain.
2. b.      What is the transfer price you would recommend if Corporate Division was not operating at capacity? Would this be an ethical price to charge the Government client? Explain.