finance data bank
136.What are the principal advantages and disadvantages of using cost-based transfer prices? (Give a short explanation of each item you list.)
137.1. Provide a reason why an organization might choose a particular transfer pricing alternative for domestic transfers and a different transfer pricing alternative for international transfers.
2. Provide a reason why an organization may not want to use two different transfer pricing systems, one for domestic transfers and another for international transfers.
The text notes that there are various objectives of transfer pricing. This raises the possibility of using multiple transfer pricing systems. For example, an organization could use one transfer pricing alternative for domestic transfers and another alternative for transnational transfers.
138.1. What are the primary advantages of using market price as the transfer price? 2. What are the primary disadvantages of using market price as the transfer price?
As noted in the text, the use of market price can be used to set the transfer price associated with interdivisional transfers of goods and services.
139.1. Assume that there are no alternative uses for Division P's facilities. Determine whether the company as a whole will benefit if Division B purchases the product externally. At what amount should the transfer price be set such that each divisional manager, acting in the best interest of his or her own division, take actions that are in the best interest of the company as a whole?
2. Assume that Division P's facilities would not otherwise be idle if it didn't produce the product for Division B. By not producing the product for Division B, the freed-up facilities would be used to generate a net cash benefit of $1,800. Should Division B purchase from suppliers? (Show calculations.)
3. Assume that for the foreseeable future there are no alternative uses for Division P's facilities, and that the outside supplier's cost to Division B drops by $2. Under this circumstance, should Division B purchase externally? At what amount should the transfer price be set such that each divisional manager, acting in the best interest of his or her division, would take actions that are in the best interest of the company as a whole?
Assume the following facts regarding a product that Division P can sell internally (to Division B) or externally on the open market. Incremental cost to Division P for each unit produced = $12. External purchase price, to be paid by Division B = $13.50. Total units needed (annually) by Division B = 1,000.
140.1. If Division B purchased the units externally, would the firm as a whole benefit or lose (in terms of a short-term financial impact)? Show calculations.
2. Apply the general transfer-pricing model to this situation. What is the minimum transfer price indicated for each of the 1,000 units in question? Show calculations.
3. What is the likely consequence, from a decision standpoint, if the transfer price is set at the amount stipulated by the general transfer-pricing rule?
Assume two divisions, P (producing) and B (buying) of a company are both treated as investment centers for performance-evaluation purposes. Division B requires 1,000 units of product that it can either purchase externally on the open market for $13.50 per unit, or obtain internally from Division P. The incremental (out-of-pocket) costs to Division P are estimated at $12.00 per unit. Because of spot shortages of this product in the open market, it is sometimes possible for Division P to sell at a price higher than the normal market price. Such is currently the case: Division P has an offer to sell 1,000 units at a gross selling price of $15.50 per unit. In addition to the normal incremental production costs, Division P would have to pay an additional $0.50 sales commission cost for each unit sold externally.
141.1. Assume that Division P has limited capacity. Thus, for each unit it sells internally, it loses the opportunity to sell that unit externally. Use the general transfer-pricing rule to determine the minimum transfer price for internal transfers of units, that Division P would charge Division B. From the standpoint of Division P, why is the figure you calculated considered an acceptable transfer price?
2. What is the maximum transfer price that Division B would be willing to pay per unit on any internal transfers?
3. If top management of the company allows the managers of Divisions P and B to negotiate a transfer price, what is the likely range of possible transfer prices?
4. Assume now that Division P has excess capacity. Use the general transfer-pricing rule to determine the minimum transfer price that Division P would be willing to accept from Division B for any internal transfers. Would this transfer price motivate the correct economic decision (internal versus external transfer) from the standpoint of the company as a whole? Explain.
5. Given the situation described above in (4), would top management of the company want the transfer to take place internally? Why? (Show calculations, if appropriate.) How could top management ensure that an internal transfer would take place?
Assume two divisions of a company, P (producing) and B (buying), that are treated as investment centers for performance-evaluation purposes. As the management accountant, you've been asked to provide input to the determination of the appropriate transfer price for an exchange of product between these
two divisions. In case #1, Division P is experiencing a capacity constraint, while in case #2 it is assumed that Division P has excess capacity. The incremental production cost incurred by Division P, to the point of transfer, is $80.00 per unit. Division P can sell its output externally for $120.00 per unit, less a sales commission charge of $5.00 per unit. Currently, Division B is purchasing the product from an external supplier at $120.00 per unit, plus a $3.00 transportation charge per unit.