Question

For the following questions (8-10) about transfer pricing, assume the organization is X Co. Division S produces a component that can be sold to outside customers at a fair market price or to Division B at a transfer price. Division B uses the component to produce a finished product it sells to outside customers. Division B can also purchase the component from an outside supplier, Co. O at a fair market price.

            8.   Division S produces a component that is used by Division B. Division S’s costs of manufacturing the component is: Direct materials $30;   Direct labor $8; Variable overhead $10;   Fixed overhead $12 (based on a practical volume of 250,000 components).

Division S also incurs these costs: fixed selling & administrative $1,200,000, and variable selling $4/unit.

Division S expects to sell only 200,000 components next year. The variable selling expenses are avoidable if the component is sold internally.

Division B has been buying the same component from an external supplier for $80 each. It expects to use 40,000 units of the component next year. The manager of Division B has offered to buy 40,000 units from Division S for $56 each.                        

The maximum/minimum transfer price should be respectively:

a.	$80/48	c.	$48/48
b.	$60/50	d.	$38/30

                 

            9.   Refer to question 8. Suppose Divisions S and B agree on a transfer price of $56. What is the benefit to each division respectively?

a.	$320,000/$960,000	c.	$960,000/$320,000
b.	$1,280,000/$0	d.	$0/$1,280,000

          10.   Refer to question 8. If S is at full capacity, the transfer price should be:

a.	Between $30 and $80	c.	$30
b.	$80	d.	$60 16. Time-s For the following questions (8-10) about transfer pricing, assume the organization is X Co. Division S produces a component that can be sold to outside customers at a fair market price or to Division B at a transfer price. Division B uses the component to produce a finished product it sells to outside customers. Division B can also purchase the component from an outside supplier, Co. O at a fair market price.             8.   Division S produces a component that is used by Division B. Division S’s costs of manufacturing the component is: Direct materials $30;   Direct labor $8; Variable overhead $10;   Fixed overhead $12 (based on a practical volume of 250,000 components). Division S also incurs these costs: fixed selling & administrative $1,200,000, and variable selling $4/unit. Division S expects to sell only 200,000 components next year. The variable selling expenses are avoidable if the component is sold internally. Division B has been buying the same component from an external supplier for $80 each. It expects to use 40,000 units of the component next year. The manager of Division B has offered to buy 40,000 units from Division S for $56 each.                         The maximum/minimum transfer price should be respectively: a. $80/48 c. $48/48 b. $60/50 d. $38/30                               9.   Refer to question 8. Suppose Divisions S and B agree on a transfer price of $56. What is the benefit to each division respectively? a. $320,000/$960,000 c. $960,000/$320,000 b. $1,280,000/$0 d. $0/$1,280,000           10.   Refer to question 8. If S is at full capacity, the transfer price should be: a. Between $30 and $80 c. $30 b. $80 d. $60 16. Time-s For the following questions (8-10) about transfer pricing, assume the organization is X Co. Division S produces a component that can be sold to outside customers at a fair market price or to Division B at a transfer price. Division B uses the component to produce a finished product it sells to outside customers. Division B can also purchase the component from an outside supplier, Co. O at a fair market price.             8.   Division S produces a component that is used by Division B. Division S’s costs of manufacturing the component is: Direct materials $30;   Direct labor $8; Variable overhead $10;   Fixed overhead $12 (based on a practical volume of 250,000 components). Division S also incurs these costs: fixed selling & administrative $1,200,000, and variable selling $4/unit. Division S expects to sell only 200,000 components next year. The variable selling expenses are avoidable if the component is sold internally. Division B has been buying the same component from an external supplier for $80 each. It expects to use 40,000 units of the component next year. The manager of Division B has offered to buy 40,000 units from Division S for $56 each.                         The maximum/minimum transfer price should be respectively: a. $80/48 c. $48/48 b. $60/50 d. $38/30                               9.   Refer to question 8. Suppose Divisions S and B agree on a transfer price of $56. What is the benefit to each division respectively? a. $320,000/$960,000 c. $960,000/$320,000 b. $1,280,000/$0 d. $0/$1,280,000           10.   Refer to question 8. If S is at full capacity, the transfer price should be: a. Between $30 and $80 c. $30 b. $80 d. $60 16. Time-s

Answer 1

8. Division S produces components that sold to outside oe transferred to division B.

Cost to Division S to produce component

	Outside sale $	Transfer to B $
Direct material	30	30
Direct labor	8	8
Variable OH	10	10
Variable selling exp.	4	-
TOTAL VARIABLE COST	52	48

Division B buying component from external market at $ 80 per component.

Therefore the maximum/ minimum transfer price is=

=$80 / $48

Option (a)

Because Maximum price at which B buys component from external supplier ie. $80

And minimum price = variable cost = $48

9. Benefit to Divisions on transfer of 40000 units.

Division S expected to sale only 200000 units, however the capacity of S is 250000. The idle capacity is 50000. Therefore demand from Division B for 40000 units can be fulfilled at price $56 per unit.

Therefore benefits to both division

	Div. S	Div. B
Units transferred	40000	40000
Tranfer price / External price	56	80
Variable cost / Transfer price	48	56
Contribution	8	24
(Contribution × units)	$320000	$960000

Correct option (a) = 320000/960000

10.

If S is full capacity then on transfer of 40000 units to division B required to calculate contribution lost.

Therefore,

	Division S
External price for component	$80
Variable cost	$52
Contribution	$28

Transfer price = Variable cost + Contribution lost

= $ 48 + $ 28

= $76 per unit

Therefore correct option is (a) between $30 and $80

* Note: variable selling expenses of $4 per unit avoidable in case of internal sale.