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Transfer Pricing Situations

Please see attached file.

In each of the cases below, assume that Division X has a product that can be sold either to outside customers or to Division Y of the same company for use in its production process. The manager of the divisions are evaluated based on their divisional profits.

Case
A B
Division X:
Capacity in units 100,000 100,000
Number of units being sold to outside customers 100,000 80,000
Selling price per unit to outside customers $50 $35
Variable costs per unit $30 $20
Fixed costs per unit (based on capacity) $8 $6

Division Y:
Number of units needed for production 20,000 20,000
Purchase price per unit now being paid to an outside supplier $47 $34

Refer to the data in case A above. Assume that $2 per unit in variable selling costs can be avoided on intracompany sales. If the manager are free to negotiate and make decisions on their own, will a transfer take place? If so, within what range will the transfer price fall? Explain.

Refer to the data used in case B above. In this case, there will be no reduction in variable selling costs on intracompny sales. If the manager are free to negotiate and make decisions on theier own, will a transfer take place? If so, within what range will the transfer price fall? Explain.

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Solution Summary

Excel file shows calculations of transfer prices under different situations.

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