Question

Transfer Pricing

Fillmore Industries is a vertically integrated firm with several divisions that operate as decentralized profit centers. Fillmore’s Systems Division manufactures scientific instruments and uses the products of two of Fillmore’s other divisions. The Board Division manufactures printed circuit boards (PCBs). One PCB model is made exclusively for the Systems Division using proprietary designs, while less complex models are sold in outside markets. The products of the Transistor Division are sold in a well-developed competitive market; however, one transistor model is also used by the Systems Division. The costs per unit of the products used by the Systems Division are as follows:

	PCB		Transistor
Direct materials	$1.80		$0.40
Direct labor	4.20		0.80
Variable overhead	2.30		0.70
Fixed overhead	0.80		0.70
Total cost	$9.10		$2.60

The Board Division sells its commercial product at full cost plus a 30 percent markup and believes the proprietary board made for the Systems Division would sell for $12 per unit on the open market. The market price of the transistor used by the Systems Division is $3.75 per unit.

Required:

1. What is the minimum transfer price for the Transistor Division? Round your answer to the nearest cent.
$ fill in the blank 1per unit

What is the maximum transfer price of the transistor for the Systems Division? Round your answer to the nearest cent.
$ fill in the blank 2per unit

2. Assume the Systems Division is able to purchase a large quantity of transistors from an outside source at $2.60 per unit. Further assume that the Transistor Division has excess capacity. Can the Transistor Division meet this price?

Answer 1

Answer-

Before answering the above question,we must understand the basic rule of transfer pricing withing the Division of Same Company.

If the divisions have Excess Production Capacity of any particular product then such division should transfer the product at variable cost only.This Transsfer price at varaible cost is limited for the no. of units which are having excess capacity, Any transfer made out of employed capacity must be Transferred at Market Price Only.

Sometimes,there are scenarios where the divisions produce the product as per specification of other division, which mean ascertaining the market price is not feasible.In these type of cases various method of Negotiations and cost based transfer types of method of Transfer pricing comes into picture.

Answer-1

In the given case we have not been provided with the information of Capacity of the Transistor division,hence we must assume that no excess capacity is available.If we look the scenarios with the perespective of Transistor Division then this will always like to sell it's product at a minimum price of Varibale cost i.e $ 1.90 per unit [0.4+0.8+0.7].

Whereas the maximum transfer price should be $ 3.75.Since this is the ultimate price which is feasible [Due to Market Rate] to charge from system Division.

Answer-2

Yes, the transistor Division can meet this price because they are having excess capacity of the Production of transistors.Since the Excess capacity will have marginal cost, limited to variable cost of production,hence with the purpose of comman goal of company they should transfer the Product at Variable cost Only. i.e. $1.9 per Unit.

thats it,

You are requested to comment for any explanation,

thanks,