Question

Carreker, Inc., has a number of divisions, including the Alamosa Division, producer of surgical blades, and the Tavaris Division, a manufacturer of medical instruments. Alamosa Division produces a 2.6 cm steel blade that can be used by Tavaris Division in the production of scalpels. The market price of the blade is $21. Cost information for the blade is:

Variable product cost $ 9.70

Fixed cost 5.50

Total product cost $15.20

Tavaris needs 15,000 units of the 2.6 cm blade per year. Alamosa Division is at full capacity (90,000 units of the blade).

1. If Carreker, Inc., has a transfer pricing policy that requires transfer at full product cost, what would the transfer price be? Do you suppose that Alamosa and Tavaris divisions would choose to transfer at that price?
2. If Carreker, Inc., has a transfer pricing policy that requires transfer at full cost plus 25 percent, what would the transfer price be? Do you suppose that Alamosa and Tavaris divisions would choose to transfer at that price?
3. If Carreker, Inc., has a transfer pricing policy that requires transfer at variable product cost plus a fixed fee of $2.00 per unit, what would the transfer price be? Do you suppose that Alamosa and Tavaris divisions would choose to transfer at that price?
4. What if Alamosa Division plans to produce and sell only 65,000 units of the 2.6 cm blade next year? The Carreker, Inc., policy is that all transfers be at full cost. Which division sets the minimum transfer price, and what is it? Which division sets the maximum transfer price, and what is it? Do you suppose that Alamosa and Tavaris divisions would choose to transfer?

Answer 1

1	As the Carreker Inc. requires transfer at full product cost, transfer price will be
	$15.20. Variable cost plus fixed cost.
	Alamosa would not choose to transfer at that price as it will not be able to earn
	any profit at that price
	Tavaris would chosse to transfer at that price as it will reduce the divisions
	cost and increase the profit.
2	As the Carreker Inc. requires transfer at full product cost plus 25%, transfer price will be
	Variable cost	$9.70
	Fixed cost	$5.50
	Total Cost	$15.20
	25% Margin (15.20 x 25%)	$3.80
	Transfer Price	$19.00
	Alamosa would not choose to transfer at that price as this price is below the
	market price.
	Tavaris would chosse to transfer at that price as this price is below the market
	price
3	As the Carreker Inc. requires transfer at variable product cost plus fixed fee of $2 per unit,
	transfer price will be
	Variable cost	$9.70
	Fixed fee	$2.00
	Total Cost	$11.70
	Alamosa would not choose to transfer at that price as at that price it will not be able to cover
	the fixed cost per unit
	Tavaris would chosse to transfer at that price as this price is below the market
	price
4	If Alamosa plans to produce and sells only 65000 unit, fixed cost per unit will be
	Total fixed cost ($5.50 x 90000 units)	495000
	Units to be produced and sell	65000
	Fixed cost per unit	7.62
	Alamosa will set the minimum transfer price
	Variable cost	$9.70
	Opportunity cost (21-9.70)	$11.30
	Transfer Price	$21.00
	Tavaris would set the maximum ttransfer price
	Market price	$21
	Both, Alamosa and Tavaris would choose to transfer