Question

1. MVS, Inc. produces cleaning equipment, and operates several divisions. Division A produces a product that it sells to other companies for $26 per unit. It is currently operating at full capacity of 60,000 units per year. Variable manufacturing cost is $13 per unit, and variable marketing cost is $3 per unit.

The company wishes to create a new division, Division B, to produce an innovative new tool that requires the use of Division A's product (or one very similar). Division B will produce 15,000 units. Division B can purchase a product equivalent to Division A's from Company X for $20 per unit. However, MVS, Inc. is considering having Division A supply Division B with the product.

If Division A supplies Division B, the transfer price would be $17 and there would be no marketing costs associated with the units.

From Division B's perspective the net benefit (cost) is?

A. Net benefit of $45,000

B. Net benefit of $40,000

C. Net cost of $135,000

D. Net cost of $60,000

2. MVS, Inc. produces cleaning equipment, and operates several divisions. Division A produces a product that it sells to other companies for $26 per unit. It is currently operating at full capacity of 60,000 units per year. Variable manufacturing cost is $13 per unit, and variable marketing cost is $3 per unit.

The company wishes to create a new division, Division B, to produce an innovative new tool that requires the use of Division A's product (or one very similar). Division B will produce 15,000 units. Division B can purchase a product equivalent to Division A's from Company X for $20 per unit. However, MVS, Inc. is considering having Division A supply Division B with the product.

If Division A supplies Division B, the transfer price would be $17 and there would be no marketing costs associated with the units.

From MVS, Inc.'s perspective the net benefit (cost) is?

A. Net benefit of $90,000

B. Net benefit of $45,000

C. Net cost of $45,000

D. Net cost of $60,000

Answer 1

Transfer pricing is a method by which products of divisions are transferred at certain price.This method is useful in case of company having multiple productline and some of the product is input for other products.

Answer to 1 is Net benefit of $ 45,000 to division B.

Answer to 2 Net Cost to MVS Inc.is $ 45,000.

Detailed analysis has been attached in image 1

You are requested to provide your reasonable inputs.

Thank you.