This question is incomplete, the complete question is;
Transfer Pricing: Various Computations
Corning Company has a decentralized organization with a divisional structure. Two of these divisions are the Appliance Division and the Manufactured Housing Division. Each divisional manager is evaluated on the basis of ROI.
The Appliance Division produces a small automatic dishwasher that the Manufactured Housing Division can use in one of its models. Appliance can produce up to 20,000 of these dishwashers per year. The variable costs of manufacturing the dishwashers are $98.The Manufactured Housing Division inserts the dishwasher into the model house and then sells the manufactured house to outside customers for $73,000 each. The division's capacity is 4,000 units. The variable costs of the manufactured house (in addition to the cost of the dishwasher itself) are $42,600.
Required:
Assume each part is independent, unless otherwise indicated.
1) Assume that all of the dishwashers produced can be sold to external customers for $320 each. The Manufactured Housing Division wants to buy 4,000 dishwashers per year. What should the transfer price be?
2) Refer to Requirement 1. Assume $24 of avoidable distribution costs. Identify the maximum and minimum transfer prices.
3) Assume that the Appliance Division is operating at 75 percent capacity. The Manufactured Housing Division is currently buying 4,000 dishwashers from an outside supplier for $290 each. Assume that any joint benefit will be split evenly between the two divisions. What is the expected transfer price?
Answer:
a) The transfer price TP is the market ( $ 320 )
b)
- minimum transfer price : $ 296
- maximum transfer price : $ 320
c) the expected transfer price is $ 194
Explanation:
Given the data in the question;
a) What should the transfer price be?
The transfer price TP is the market ( $ 320 ) as all the dishwashers produced will be sold to the external customers for $ 320 .
b) Identify the maximum and minimum transfer prices?
Refer to question 1 above and assuming $24 of avoidable distribution costs.
the maximum and minimum transfer prices will be;
- minimum transfer price : $ 320 - $ 24 = $ 296
- maximum transfer price : $ 320
c) What is the expected transfer price?
given that; the variable costs of manufacturing the dishwashers are $98.
The Manufactured Housing Division is currently buying 4,000 dishwashers from an outside supplier for $290 each.
so potential gain = $290 - $98
= $ 192
thus, share of gain of each division will be;
⇒ $ 192 / 2 = $ 96
so the transfer price will be;
⇒ $ 98 + $ 96
= $ 194
Therefore, the expected transfer price is $ 194
