Question

Determining Market-Based and Negotiated Transfer Prices

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 2.7 cm steel blade that can be used by Tavaris Division in the production of scalpels. The market price of the blade is $22. Cost information for the blade is:

Variable product cost	$ 9.50
Fixed cost	5.10
Total product cost	$14.60

Tavaris needs 20,000 units of the 2.7 cm blade per year. Alamosa Division is at full capacity (84,000 units of the blade).

Required:

1. If Carreker, Inc., has a transfer pricing policy that requires transfer at market price, what would the transfer price be?
$ per unit

Do you suppose that Alamosa and Tavaris divisions would choose to transfer at that price?

2. Now suppose that Carreker, Inc., allows negotiated transfer pricing and that Alamosa Division can avoid $1.55 of selling and distribution expense by selling to Tavaris Division. Which division sets the minimum transfer price, and what is it? Round your answers to the nearest cent, if needed.
$ per unit

Which division sets the maximum transfer price, and what is it?
$ per unit

Do you suppose that Alamosa and Tavaris divisions would choose to transfer somewhere in the bargaining range?

3. What if Alamosa Division plans to produce and sell only 69,000 units of the 2.7 cm blade next year? Which division sets the minimum transfer price, and what is it? Round your answers to the nearest cent, if needed.
$ per unit

Which division sets the maximum transfer price, and what is it?
$ per unit

Do you suppose that Alamosa and Tavaris divisions would choose to transfer somewhere in the bargaining range? Yes or No

Answer 1

Ans 1. if transfer policy is transfer to current price then the Transfer price is equal to market price.

Transfer price is blade is $22

due to Alamosa division running in full capacity, for that minimum transfer price is equal to market price because alamosa division able to sell the blade in the market. if market price is equal transfer price so both deptt will agree for transfer price of blade is $22

2. Selling and distribution exp is $1.55

Maximum transfer price will be set up by Tavaris division is equal to market price of $22

Minimum transfer price will be set up by Alamosa division is equal to market price less selling and distribution exp. that is equal to (22-1.55) = 20.45

yes both division will be choose somewhere of the transfer price of bargining range of $20.45 to $22.

3. if demand of blade in the next year is only 69000, and capacity is 84000 so that spare capacity is (84000-69000) 15000.

Minimum price will be set up by Alamosa division that is equal to Variable cost of production. fixed we will not consider for decision making because that allocated cost.

Minimum price (set up by Alamosa division) = $9.50

Maxmimum price set up by Tavaris divison that is equal to market price of blade =$22

Yes both divison will choose transfer price in the range of between $9.50 to $22