Question

Decision on transfer pricing

Materials used by the Instrument Division of XPort Industries are currently purchased from outside suppliers at a cost of $273 per unit. However, the same materials are available from the Components Division. The Components Division has unused capacity and can produce the materials needed by the Instrument Division at a variable cost of $227 per unit.

Assume that a transfer price of $259 has been established and that 23,700 units of materials are transferred, with no reduction in the Components Division’s current sales.

a. How much would XPort Industries’ total income from operations increase?
$

b. How much would the Instrument Division’s income from operations increase?
$

c. How much would the Components Division’s income from operations increase?
$

d. Any transfer price will cause the total income of the company to  , as long as the supplier division capacity is   toward making materials for products that are ultimately sold to the outside.

Answer 1

solution:

a. How much would XPort Industries' total income from operations increase?

Working: ($273- $227) * 23,700 units = $10,90,200

b. How much would the Instrument Division's income from operations increase?

Working: $273-$259 * 23700

=331800

c. How much would the Components Division's income from operations increase?

Working: ($259- $227) x 23700

=758400

d.Any exchange cost will make the all out pay of the organization increment , as long as the provider division limit is utilized toward making materials for items that are at last sold to the outside. Arrangement: Any exchange cost will make the absolute salary of the organization increment, as long as the provider division limit is utilized toward making materials for items that are eventually sold to the outside. Yet, the exchange costs should be set between factor cost and pitching cost to guarantee that the division supervisors legitimate motivating forces. An exchange value set underneath factor cost may lead the provider division to bring about a misfortune, and if an exchange value set above market cost will result the obtaining division to bring about circumstance costs. Both of these circumstance isn't an appealing option for a venture focus supervisor. Thus the general guideline is to arrange exchange costs among variable expense and market cost when the provider division has abundance limit. The scope of satisfactory exchange costs for the organization would be somewhere in the range of $273 and $227