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USA Company's Box Division: Transfer Pricing at Full Capacity

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The USA Company's Box Division produces cardboard boxes used for packaging microwavable fast foods. The Consumer Products Division produces a variety of fast-food entrees that are packaged in boxes. In the past the Consumer Products Division has purchased its boxes from the Box Division for .15 each. The Box Division currently is producing at capacity and sells 6,000,000 of these boxes each year at a price of .15. The Consumer Products Division has offered to buy 500,000 boxes per year from the Box Division at an internal transfer price of .13 per box. The Box Division's cost to produce each box consists of 0.09 of variable costs and 0.04 of fixed costs.

A. What is the minimum transfer price that would be acceptable to the Box Division?
B. Assume that by selling the boxed internally, the Box Division would avoid 0.03 of variable costs. Should the internal transfer be accepted at 0.13 per box? Explain.

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Question A
The minimum transfer price is 0.09 which is the box's total ...

Solution Summary

This solution identifies the minimum transfer prices and provides recommendations if an internal transfer price of 0.13 per box should be accepted and why.

See Also This Related BrainMass Solution

Transfer-Pricing Concession - Short term special order

You are the divisional controller of the US division of Samtech Electronics. Your division is operating at capacity. The Australian division has asked the US division to supply a sound system (chip and speaker), which it will use in a new model Game Box that it is introducing. The US division currently sells an identical sound system to outside customers for $11.00 each. The Australian division offered to pay $7.00 for each sound system. The total cost is...

Purchased Parts from outside vendors_______$28.10
Sound system from US Division____________$7.00
Other variable costs______________________$17.50
Fixed overhead__________________________$10.00

Game Box is as follows:

The Australian division is operating at 50% of capacity and this Game Box is an important new product introduction to increase its use of capacity. Based on a target costing approach, the Australian division management has decided that paying more than $7.00 for the sound system would make production of the Game Box infeasible because the predicted selling price for the Game Box is only $62.00.

Samtech Electronics evaluates divisional managers on the basis of pretax ROI and dollar profits compared to the budget. Ignore taxes and tariffs.

1. As divisional controller of the US division, would you recommend supplying the sound system to the Australian division for $7.00? Why or why not?

2. Would it be to the short run economic advantage of Samtech Electronics for the US Division to supply the sound system to the Australian division? Explain your answer.

3. Discuss the organizational and behavioral difficulties, if any in this inherent situation. As the US Division controller would you advise the Samtech Electronics President to do in this situation?

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