Question

In: Economics

If an internal selling division can also sell products to outside companies at a prices that...

If an internal selling division can also sell products to outside companies at a prices that are greater than the selling division's marginal costs for these products how should the selling division set its transfer prices for these same products when it sells them to the internal buying division?

Solutions

Expert Solution

The goods are generally transferred internally when the minimum price of selling division is equal or less than the maximum price of selling division. With these maximum and minimum prices, the managers can determine on the transfer price. The price to determine the value of internal transfers of goods and services is termed to be transfer price. When the goods are sold outside the firm the market price often determines the transfer price. The external market price also acts as an excellent internal transfer price as it permits both selling and internal division to be treated as an independent firm. The selling division may also save on advertising cost and shipping cost; and reduce the costs of production when the selling division finds it simpler to schedule the production for internal sales in comparison to external sales. Thus adjusted transfer price will be computed as: Market price - Saving due to reduced manufacturing costs - savings due to reduced shipping costs


Related Solutions

Many feel that companies have a social responsibility not to sell products that can be harmful to consumers.
Many feel that companies have a social responsibility not to sell products that can be harmful to consumers.  For example: Should McDonald’s stop selling Big Macs because some customers do not control their diets and become obese from fast food? The same argument can be made for numerous products on the market.-Choose any product in your local market that you consider harmful to consumer.-Discuss how decision makers must adopt policies that take into account the social consequences of their business actions
Explain how and why companies partner with other companies to sell products.
Explain how and why companies partner with other companies to sell products. 
Katsen Coffee has two divisions, Roasting and Brewing. The Roasting division can sell its products to...
Katsen Coffee has two divisions, Roasting and Brewing. The Roasting division can sell its products to an external market for $15 per unit. The division's variable manufacturing costs are $4.5 per pound and fixed manufacturing costs are $0.90 per pound. Using the economic rule of transfer pricing, what internal price should be set to transfer a pound of coffee from the Roasting division to the Brewing division? Assume there is sufficient capacity to support the internal transfer. Now assume the...
Why should transfer prices equal the marginal cost of the selling division within a company that...
Why should transfer prices equal the marginal cost of the selling division within a company that is selling to a buying , division in the same company when this same selling division has no opportunity to make any sales of what it sells to third parties outside the corporation. In your answer make sure you fully explain the double marginalization issue that arises if transfer prices are set higher in this situation than marginal costs
As the internal auditor of the Sell Anything Group of companies, you have been asked to...
As the internal auditor of the Sell Anything Group of companies, you have been asked to investigate the cash sales system of Stationery Ltd., one of the subsidiaries. Stationery sells office supplies in the Halifax area. Its prices are highly competitive and it offers a same-day delivery service for orders telephoned before noon. Costs are kept down by requiring cash on delivery. Sales are made in the following way: 1. The customer phones through an order to the sales department,...
The Pole Division produces poles which can be sold to outside customers or transferred to the...
The Pole Division produces poles which can be sold to outside customers or transferred to the Flag Division. The following data are available for last year's activities in the Pole Division: Capacity in units                     400,000 poles Outside demand                      380,000 poles Demand by Flag Division         25,000 poles Selling price                               $5.00 Variable cost                              $2.75 Total fixed costs                     $200,000    On a transfer to the Flag Division, the Pole Division can save $0.65 of the variable costs per unit transferred.  HINT: Figure out the opportuning cost for the 5,000...
Division P of the Nyers Company makes a part that can either be sold to outside...
Division P of the Nyers Company makes a part that can either be sold to outside customers or transferred internally to Division Q for further processing. Annual data relating to this part are as follows: Annual production capacity................................... 200,000 units Selling price of the item to outside customers...... $68 Variable cost per unit............................................. $24 Fixed cost per unit................................................. $35 Division Q of the Nyers Company requires 40,000 units per year. Consider each part below independently. 1) If outside customers demand...
in massachusetts, there are many private companies selling life insurance at competative prices but no one...
in massachusetts, there are many private companies selling life insurance at competative prices but no one sells inckme insurance to protect people from losing their jobs or being forced to take work at signifigantly lower earnings. why do competative markets work better for life insurance than for income insurance?
Should companies be penalized or individuals thrown in jail for raising prices or selling “gouged” supplies?...
Should companies be penalized or individuals thrown in jail for raising prices or selling “gouged” supplies? What, if anything, does this help protect against? Do you think it is a fair punishment? Why or why not?
Why might a company sell its products for different prices in different markets even if the...
Why might a company sell its products for different prices in different markets even if the income levels of its target consumers were the same in all cases?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT