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# Transfer Pricing

See attached, have general idea of costing, need assistance with verification of costs and determining consideration issues listed.

M10 - 2 Transfer Pricing

Smith Company has two divisions, Division A and Division B.
Division A currently sells components to Division B for \$10 per unit.
The cost of Division A to produce a component follows:
Variable cost per unit \$5
Fixed cost per unit \$2 (based on 100,000 units)
Division A typically sells 40,000 components to Division B and 40,000 components to external customers.

The manager of Division B is considering buying components from an outside supplier that submitted a bid of \$8.
a. Calculate the cost savings to Division B if the manager decides to purchase the component externally.

b. Assume Division A cannot replace lost sales in the short run if Division B purchases components externally. How does the fixed cost per unit change?

c. From the perspective of the corporation as a whole, should Division B purchase the components externally? Explain.

d. What other factors should Division B's management consider in its decision of whether to buy from an outside source?

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Class Discussion
M10 - 2 Transfer Pricing

Smith Company has two divisions, Division A and Division B.
Division A currently sells components to Division B for \$10 per unit.
The cost of Division A to produce a component follows:
Variable cost per unit \$5
Fixed cost per unit \$2 (based on 100,000 units)
Division A typically sells 40,000 components to Division B and 40,000 components to external customers.

The manager of Division B is considering buying components from an outside supplier that submitted a bid of \$8.
a. Calculate the cost savings to Division B if the manager decides to purchase the component externally.

Presently Division B buys from Division A at \$10. The ...

#### Solution Summary

The solution explains how to determine the transfer price under different situations

\$2.19