Question

E24-26 Determining transfer pricing The Watkins Company is decentralized, and divisions are considered investment centers. Watkins specializes in sports equipment, and one division manufactures netting that is used for basketball hoops, soccer goals, and other sports equipment. The Netting Division reports the following information for a heavy-duty basketball hoop net: Sales Price per Unit $18 Variable Cost per Unit 6 Contribution Margin per Unit $12 The Basketball Equipment Division can purchase a similar heavy-duty net from an outside vendor for $15. Requirements 1. Determine the negotiable range for the transfer price. 2. What is the minimum transfer price the Netting Division should consider if operating at capacity

Answer 1

Answer:

Part 1.  

The negotiable range for the transfer price is between is $6 to $18 as the Netting division will incur loss if it sells its product below its variable cost whereas the maximum price it can transfer the product to Basketball equipment department is equal to the selling price that is $18.

Therefore, negotiable range is between for the transfer price is $6 to $18.

Part 2.  

The minimum transfer price the Netting division should consider if at operating capacity is $18.

If they are at below capacity, the minimum transfer price would be $6.

Part 3.  

The maximum transfer price the basketball equipment division should consider must be equal to the price outside vendors are charging for the same quality product that is $15.

Therefore, the maximum transfer price the Basketball Equipment Division should consider is $15.