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    TPexample

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    The Electrical Division of SLOWCAR Company has excess production capacity and can produce batteries for $72 per unit, well below their normal cost of $114 per unit. The Assembly Division has offered to purchase 90,000 batteries for $104 each. It would be beneficial for the company for the Electrical Division to accept this internal transfer, as it would save the company $5.22 million per year compared to the Assembly Division purchasing batteries externally for $130 each. The acceptable transfer price range is $72 per unit as the minimum, up to $130 per unit which is what batteries can be obtained from outside suppliers.

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    TPexample

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    lilbouyin
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    The Electrical Division of SLOWCAR Company has excess production capacity and can produce batteries for $72 per unit, well below their normal cost of $114 per unit. The Assembly Division has offered to purchase 90,000 batteries for $104 each. It would be beneficial for the company for the Electrical Division to accept this internal transfer, as it would save the company $5.22 million per year compared to the Assembly Division purchasing batteries externally for $130 each. The acceptable transfer price range is $72 per unit as the minimum, up to $130 per unit which is what batteries can be obtained from outside suppliers.

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    The Electrical Division of SLOWCAR Company has excess production capacity and can produce batteries for $72 per unit, well below their normal cost of $114 per unit. The Assembly Division has offered to purchase 90,000 batteries for $104 each. It would be beneficial for the company for the Electrical Division to accept this internal transfer, as it would save the company $5.22 million per year compared to the Assembly Division purchasing batteries externally for $130 each. The acceptable transfer price range is $72 per unit as the minimum, up to $130 per unit which is what batteries can be obtained from outside suppliers.

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    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    30 views3 pages

    TPexample

    Uploaded by

    lilbouyin
    The Electrical Division of SLOWCAR Company has excess production capacity and can produce batteries for $72 per unit, well below their normal cost of $114 per unit. The Assembly Division has offered to purchase 90,000 batteries for $104 each. It would be beneficial for the company for the Electrical Division to accept this internal transfer, as it would save the company $5.22 million per year compared to the Assembly Division purchasing batteries externally for $130 each. The acceptable transfer price range is $72 per unit as the minimum, up to $130 per unit which is what batteries can be obtained from outside suppliers.

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    © All Rights Reserved
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    of 3

    Transfer Price (in-class problem)

    The Assembly Division of SLOWCAR Company has offered to


    purchase 90,000 batteries from the Electrical Division (ED) for $104 per
    unit. At a normal volume of 250,000 batteries per year, production costs
    per battery are:

    Direct materials $40


    Direct labor 20
    Variable factory overhead 12
    Fixed factory overhead 42
    Total $114
    The Electrical Division has been selling 250,000 batteries per year to
    outside buyers for $136 each. Capacity is 350,000 batteries/year. The
    Assembly Division has been buying batteries from outside suppliers for
    $130 each.

    Should the Electrical Division manager accept the offer? Will an


    internal transfer be of any benefit to the company?
    ***************************************************
    ED manager should accept. There is surplus capacity. So the relevant
    costs to the ED is the VC = $72 / battery.
    The increased CM to the ED would be 90,000*($104 – 72) = $2.88 M

    The company would be better off with an internal transfer. Currently


    paying $130 for batteries that could be made internally for incremental
    cost of $72. The company would save 90,000 * (130 – 72) = $5.22 M
    per year!

    The TP range = max. of $130 to low of $72

    What if there is no excess capacity?? (max. = $130, but min.= $136)


    Transfer price: example 2
    Min. transfer price = incremental (outlay) costs/unit to point of transfer + 
    opportunity cost/unit to the supply division.

    The SF Manufacturing Co. has two divisions in Iowa, the Supply Division and the BUY 
    Division.  Currently, the BUY Division buys a part (3,000 units) from Supply for $12.00 
    per unit.  Supply wants to increase the price to BUY to $15.00.  The controller of BUY 
    claims that she cannot afford to go that high, as it will decrease the division’s profit to 
    near zero.  BUY can purchase the part from an outside supplier for $14.00.  The cost 
    figures for Supply are:
    Direct Materials                        $3.25
    Direct Labor                                4.75
    Variable Overhead                      0.60
    Fixed Overhead                           1.20
    A. If Supply ceases to produce the parts for BUY, it will be able to avoid one­third of the 
    fixed MOH.  Supply has no alternative uses for its facilities.  Should BUY continue to get
    the units from Supply or start to purchase the units from the outside supplier?  (From the 
    standpoint of SF as a whole).
    (What is the min. & max. transfer price if BUY and SUPPLY negotiate?)

    MAX. TP = $14.00 / unit  (most BUY is willing to pay, market price)
    MIN. TP = $8.60 + (1/3 * 1.20) = $9.00

    MAX > MIN so transfer internally would happen and be in the best interests of SF!

    Now, assume that Supply could use the facilities currently used to produce the 3,000 
    units for BUY to make 5,000 units of a different product.  The new product will sell for 
    $16.00 and has the following costs:
    Direct Materials                        $3.00
    Direct Labor                                4.30
    Variable Overhead                      5.40

    B.  What is the min. & max. transfer price if BUY and SUPPLY negotiate?

    Supply VC = $8.60 + lost CM
    Lost CM = $16 – 12.70 = $3.30 / unit of new product = $16,500 total lost CM
    OR $16,500 / 3,000 units transferred to BUY = $5.50/unit made for BUY

    MAX. TP = $14.00
    MIN. TP = $8.60 + $5.50 =  $14.10

    C. What should be done from the company’s point of view?  Why?
    SF is better off for SUPPLY to make new product and BUY to get part from 
    outside.

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