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Transfer Pricing - 1

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29 views3 pages

Transfer Pricing - 1

Uploaded by

k.canas.135300.tc
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Sample Problems for Transfer Pricing 1.

0
Subject: Performance Management System Subject Code: 5972

Problem 1.
Bronx Corporation's Gauge Division manufactures and sells product no. 24, which
is used in refrigeration systems. Per-unit variable manufacturing and selling costs
amount to P20 and P5, respectively. The Division can sell this item to external
domestic customers for P36 or, alternatively, transfer the product to the
company's Refrigeration Division. Refrigeration is currently purchasing a similar
unit from Taiwan for P33. Assume use of the general transfer-pricing rule.
Required:
A. What is the most that the Refrigeration Division would be willing to pay
the Gauge Division for one unit?
B. If Gauge had excess capacity, what transfer price would the Division's
management set?
C. If Gauge had no excess capacity, what transfer price would the Division's
management set?
D. Repeat part "C," assuming that Gauge was able to reduce the variable
cost of internal transfers by P4 per unit.

Problem 2.
McKenna's Florida Division is currently purchasing a part from an outside
supplier. The company's Alabama Division, which has excess capacity, makes
and sells this part for external customers at a variable cost of P22 and a selling
price of P34. If Alabama begins sales to Florida, it (1) will use the general
transfer-pricing rule and (2) will be able to reduce variable cost on internal
transfers by P4. If sales to outsiders will not be affected, Alabama would
establish a transfer price of:

Problem 3.
AutoTech's Northern Division is currently purchasing a part from an outside
supplier. The company's Southern Division, which has no excess capacity,
makes and sells this part for external customers at a variable cost of P19 and a
selling price of P31. If Southern begins sales to Northern, it (1) will use the
general transfer-pricing rule and (2) will be able to reduce variable cost on
internal transfers by P3. On the basis of this information, Southern would
establish a transfer price of:
Problem 4.
Gamma Division of Vaughn Corporation produces electric motors, 20% of which are
sold to Vaughan's Omega Division and 80% to outside customers. Vaughn treats its
divisions as profit centers and allows division managers to choose whether to sell to
or buy from internal divisions. Corporate policy requires that all interdivisional sales
and purchases be transferred at variable cost. Gamma Division's estimated sales
and standard cost data for the year ended December 31, based on a capacity of
60,000 units, are as follows:

Omega Outsiders
Sales P 660,000 P5,760,00
0
Less: Variable costs 660,000 2,640,00
0
Contribution margin P ---- P3,120,00
0
Less: Fixed costs 175,000 900,00
0
Operating income (loss) P(175,000) P2,220,00
0

Unit sales 12,000 48,0


00

Gamma has an opportunity to sell the 12,000 units shown above to an outside
customer at P80 per unit. Omega can purchase the units it needs from an outside
supplier for P92 each.
Required:
A. Assuming that Gamma desires to maximize operating income, should it
take on the new customer and discontinue sales to Omega? Why? (Note:
Answer this question from Gamma's perspective.)

B. Assume that Vaughn allows division managers to negotiate transfer


prices. The managers agreed on a tentative price of P80 per unit, to be
reduced by an equal sharing of the additional Gamma income that results
from the sale to Omega of 12,000 motors at P80 per unit. On the basis of
this information, compute the company's new transfer price.

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