Question

Bambi Company manufactures fast-baking ovens in the United States at a production cost of $500 per unit and sells them to uncontrolled distributers in the United States and a wholly owned sales subsidiary in Canada. Bambi’s U.S. distributors sell the ovens to restaurants at a price of $1,000 and its Canadian subsidiary sells the ovens at a price of $1,100. Other distributors of similar ovens to restaurants in Canada can earn a gross profit (i.e., markup) of 25% of selling price. Bambi’s main U.S. competitor sells ovens at an average 50% markup on cost. Bambi’s Canadian subsidiary incurs operating costs (other than COGS), that average $250 per oven sold. The average operating profit margin earned by Canadian oven distributors is 5% (of sales). Sales $1,100 - cost 250 5%*1,100 = 55 profit Cost of goods sold = $795 1. Which of the following would be an acceptable transfer price under the resale price method? Show your calculations a. $700 b. $750 c. $795 d. $825 2. Which of the following would be an acceptable transfer price under the cost-plus method? Show your calculations a. $700 b. $750 c. $795 d. $825 3. Which of the following would be an acceptable transfer price under the comparable profits method? Show your calculations a. $700 b. $750 c. $795 d. $825

Answer 1

Answer:

1. d. $825

2. b. $750

3. c. $795

Explanation:

1. Transfer price under the resale price method

Acceptable price under resale method = Selling price of Subsidiary - Profit%  

= $1,100 - 25%*$1,100

= $1,100 - $275

= $825

2. Transfer price under the cost-plus method

Cost plus method = Cost+Markup

= $500 + $500*50%

= $500 + $250

= $750

3. Transfer price under the comparable profits method

Comparable profits method = Selling price - Profit  - Other costs

= $1,100 - $1,100*5% - $250

= $1,100 - $55 - $250

= $795