Question

Determining Market-Based and Negotiated Transfer Prices

Clanahan, Inc., has a number of divisions around the world. Division US (in the United States) purchases a component from Division N (in the Netherlands). The component can be purchased externally for $25.10 each. The freight and insurance on the item amount to $2.50; however, commissions of $2.50 need not be paid.

Required:

Round your answers to the nearest cent.

1. Calculate the transfer price using the comparable uncontrolled price method.
$ per unit

2. Suppose that there is no outside market for the component that Division N transfers to Division US. Further assume that Division US sells the component for $31.20 and normally receives a 30 percent markup on cost of goods sold. Calculate the transfer price using the resale price method.
$ per unit

3. Now assume that there is no external market for the component transferred from Division N to Division US, and that the component is used in the manufacture of another product (i.e., it is not resold). Calculate the transfer price using the cost-plus method. Further assume that Division N’s manufacturing cost for the component is $18.10.
$ per unit

4. What if commissions avoided were $2.75 per unit?

What would be the comparable uncontrolled price?
$ per unit

What affect would this have on the resale price?

What affect would this have on the cost-plus price?

Answer 1

Solution:

1)Calculate the transfer price using the comparable uncontrolled price method :

Particulars	Amount($)
Market price	$25.10
Add: Frieght and insurance	$2.50
Less: Commissions	($2.50)
Transfer price	$25.10

Hence, the transfer price is $25.10

2) Calculate the transfer price using the resale price method:

Under the resale price method the resale price is the sum of transfer price and the markup on transfer price.

Let transfer price be 'X'

As per the resale price method explained above:

Resale price = Transfer price +(markup percentage * transfer price)

$31.20 = Transfer price +(30% * transfer price)

$31.20 = Transfer price * 1.30

Transfer price = $31.20 / 1.30

Transfer price = $24

3)

Calculate the transfer price using the cost plus method:

Particulars	Amount
Manufacturing cost	$18.10
Add: Frieght and insurance	$2.50
Transfer price	$20.6

4)

If the commissions are avoided, then the comparable uncontrolled price would be affected, If the larger commissions are subtracted, then the transfer price would be calculated as under:

Particulars	Amount
Market price	$25.10
Add: Frieght and insurance	$2.50
Less: Commissions	($2.75)
Transfer price	$24.85

Hence, the transfer price is $24.85

There will be no impact on the transfer price determined under resale price method and the cost plus price method.

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