Question

Tiger Inc. has two mos divisions. A Divisie podaces a technical component and its capacity is 10.000 units annually. Currently. A Divi s its product at a sale price of 519 per unit to external customers. Costs per unit CA Division Prime costs MOI variable Fixed MOH Marketing Variable expenses SO $30.00 $20.00 B Division could use the technical component in the manufacturing of its computer products for next year. Variable selling expenses on sales between divisions are reduced by 40 Alternatively. the Division could buy this component from a Chinese supplier for 5120 per unit. In addition, Division would have to pay customs duties of SIO per unit on imported components REQUIRED: 1. What are the factors Tiger Inc. might consider in setting an internal transfer policy? 2. Assume A Division is operating at 80% of its capacity and B Division needs 2,000 units of the technical component next year. 2.a) what is the range of acceptable transfer prices? 2.b) will transfers occur between the divisions? Why? 2.c) How much better or worse off will each division be if transfers occur?

Answer 1

1) The following factors should be taken into consideration before fixing the transfer prices;

• It should help the accurate measurement of divisional performance.
• It should motivate the divisional managers to maximise the profitability of their divisions.
• Autonomy and authority of a division should be ensured.
• The objectives of divisional managers should match with those of the organisation.

2) At 80% capacity Division A produces 8000 units.

(a)

Let us consider transfer price on basis of actual cost. ie prime cost +MOH variable +Marketting variable.

   => 50+40+20=110p.u

But here it is given that on internal transfers variable selling expenses are reduced to 40%

So, Division A can transfer units at a price of,

50+40+(20-40%)= 102 per unit

And

Division B can accept a transfer price upto $130perunit .

ie, cost of purchase for Division B is $120p.u plus $10 import charges.

So , Range acceptable for transfer price will be $102p.u to $130p.u

(b)

Yes , transfer will occur between divisions .

Since ,division A can transer units at a cost not less than $102 p.u without incurring a loss.

And Division B can maximise the profit by purchasing the @ $102p.u from division A.

(c)  

It will be better for Division B to go for transfer from Division A at A's maximum acceptable transfer price . But as A is concerned to transer at A faces huge loss by transfering units to division B.

For division A if Units are sold outside it can sell at $190 p.u but by tranfering 2000 units to Division B @ $102- $130 p.u A losses.