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# Transfer pricing

The Company A is composed of two divisions, DivPulp and DivPaper. DivPulp produces a component that is needed by DivPaper to manufacture the final product. DivPulp also has the opportunity of selling the product to outside customers due to excess capacity. DivPulp's product information is as follows:

Selling price to outside customers \$15.00
Variable cost of production \$6.00
Fixed cost of production \$5.00
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*Maximum that DivPaper is willing to pay DivPulp is \$13.50. What is DivPulp's opportunity cost?

Transfer price = variable cost + opportunity cost
15.00 = 6.00 + OC
OC = \$9.00

Ans: \$9.00 Correct?

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*Maximum that DivPaper is willing to pay DivPulp is \$13.50. What is the ceiling price when considering a transfer price?

Ans: \$15.00 Correct?

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*Maximum that DivPaper is willing to pay DivPulp is \$13.50. What is the floor price when considering a transfer price?

Ans: \$11.00 Correct?

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#### Solution Summary

The solution explores the scenario below in great detail and comes up with an optimal transfer price.

\$2.19