Question

Decision on transfer pricing

Materials used by the Instrument Division of XPort Industries are currently purchased from outside suppliers at a cost of $213 per unit. However, the same materials are available from the Components Division. The Components Division has unused capacity and can produce the materials needed by the Instrument Division at a variable cost of $177 per unit.

Assume that a transfer price of $202 has been established and that 30,300 units of materials are transferred, with no reduction in the Components Division’s current sales.

a. How much would XPort Industries’ total income from operations increase?
$

b. How much would the Instrument Division’s income from operations increase?
$

c. How much would the Components Division’s income from operations increase?
$

d. Any transfer price will cause the total income of the company to  , as long as the supplier division capacity is   toward making materials for products that are ultimately sold to the outside.

Answer 1

a. XPort Industries’ increase in total income from operations = ($213 - $177) *30,300 units

= $1,090,800

b. Instrument Division’s increase in income from operations = ($213 - $202) * 30,300 units

= $333,300

c. Components Division’s increase in income from operations increase = ($202 - $177) * 30,300 units

= $757,500

d. Any transfer price will cause the total income of the company to Increase, as long as the supplier division capacity is not limited toward making materials for products that are ultimately sold to the outside.