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 $24.60 each. The freight and insurance on the item amount to $2.45; however, commissions of $2.60 need not be paid.

Required:

Round your answers to the nearest cent.

1. Calculate the transfer price using the comparable uncontrolled price method.
$ fill in the blank 1per 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 $27.30 and normally receives a 30 percent markup on cost of goods sold. Calculate the transfer price using the resale price method.
$ fill in the blank 2per 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 $18.50.
$ fill in the blank 3per unit

4. What if commissions avoided were $2.90 per unit?

What would be the comparable uncontrolled price?
$ fill in the blank 4per unit

What affect would this have on the resale price?

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

Answer 1

Answer :-

1)

Particulars	Amount
Market Price	$    24.60
Add : Freight and Insurance	$       2.45
Less : Commissions	$       2.60
Transfer Price	$    24.45

2)

Let transfer Price be 'x"2)

Resale price = Transfer price + (Markup percentage*Transfer price)

$27.30 = Transfer price + (30%*Transfer price)

Transfer price = $27.30/1.30 = $21

3)

Particulars	Amount
Manufacturing Cost	$    18.50
Add : Freight and Insurance	$       2.45
Transfer Price	$    20.95

4)

Particulars	Amount
Market Price	$    24.60
Add : Freight and Insurance	$       2.45
Less : Commissions	$       2.90
Transfer Price	$    24.15

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