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Transfer Pricing problem

The Assembly Division of American car Company has offered to purchase 90,000 batteries from the electrical division for $100 per unit.At a normal volume of 250,000 batteries per year,production costs per battery are as follows:

Direct materials $40
Direct labor 24
Variable factory overhead 12
Fixed factory overhead 50
Total $126

The Electrical division has been selling 250,000 batteries per year to outside buyers at $136 each; capacity is 350,000 batteries per year.The Assembly Division has been buying batteries from outside sources for $130 each.


1-If the transfer price is set at $100/batteries,Would this be in the best interests of the corporation?

Explain why and give dollar amounts?

2-Now assume that the Electrical Division has just signed a new deal to sell 50,000 batteries/year to Costco for $126 each . As part of this agreement,the Electerical Division will have to pay a $2 million fine if it delivers anything less than 50,000 batteries/year to costco.
The Assembly Division wants to buy 90,000(all or nothing)batteries from the Electrical Division.If the Assembly Division manager and the Electrical Division manager are allowed to negotiate a transfer price,

What is the min. and max. transfer price?

Solution Summary

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