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Transfer Pricing Computation

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This solution presents the implications of Transfer Pricing and clarifies and explains the relationship with inter company transfer. The study identifies contribution to overhead. Discussion focuses on three options for transfer pricing: cost plus, fair market value, and manager negatiated.

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Solution Summary

Calculates transfer pricing with formulae in excel for clarity and formula reference, with definitions and explanation. Three types of Transfer Pricing are reviewed: cost plus, fair market value, and manager negotiated.

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10-A4 Transfer pricing 20X7 Portland division of Machine Products

Consider the following data regarding budgeted operations for 20X7 of the Portland division of Machine Products:

______________________________________________________________________

Average total assets
Receivables $220,000
Inventories 290,000
Plant and equipment, net 450,000
Total $960,000
Fixed overhead $300,000
Variable Costs $1 per unit
Desired rate o return on average total assets 25%
Expected volume 150,000 units
______________________________________________________________________

1. a. What average unit sales price does the Portland division need to obtain its desired
rate of return on average total assets:
b. What would be the expected capital turnover?
c. What would be the return on sales?

2. a. If the selling price is as previously computed, what rate of return will the division
earn on total assets if sales volume is 170,000 units?
b. If sales volume is 130,000 units?

3. Assume that the Portland division plans to sell 45,000 units to the Calgary division of
Machine Products and that it can sell only 105,000 units to outside customers at the
price computed in requirement 1a. The Calgary division manager has balked at a
tentative transfer price of $4. She has offered $2.25, claiming that she can
manufacture the units herself for that price. The Portland division manager has
examined his own data. He had decided that he could eliminate $60,000 of
inventories, $90,000 of plant and equipment, and $22, 500 of fixed overhead if he did
not sell to the Calgary division and sold only 105,000 units to outside customers.
Should he sell for $2.25? Show computations to support your answer.

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