Question

Determining Market-Based and Negotiated Transfer Prices Carreker, Inc., has a number of divisions, including the Alamosa Division, producer of surgical blades, and the Tavaris Division, a manufacturer of medical instruments. Alamosa Division produces a 2.6 cm steel blade that can be used by Tavaris Division in the production of scalpels. The market price of the blade is $21.00. Cost information for the blade is: Variable product cost $9.40 Fixed cost 5.60 Total product cost $15.00 Tavaris needs 15,000 units of the 2.6 cm blade per year. Alamosa Division is at full capacity (90,000 units of the blade). Required: Round your answers to the nearest cent. 1. If Carreker, Inc., has a transfer pricing policy that requires transfer at full product cost, what would the transfer price be? per unit Do you suppose that Alamosa and Tavaris divisions would choose to transfer at that price? Alamosa Tavaris 2. If Carreker, Inc., has a transfer pricing policy that requires transfer at full cost plus 25 percent, what would the transfer price be? per unit Do you suppose that Alamosa and Tavaris divisions would choose to transfer at that price? Alamosa Tavaris 4. What if Alamosa Division plans to produce and sell only 65,000 units of the 2.6 cm blade next year? The Carreker, Inc., policy is that all transfers be at full cost. Which division sets the minimum transfer price, and what is it? per unit Which division sets the maximum transfer price, and what is it? $ per unit Do you suppose that Alamosa and Tavaris divisions would choose to transfer?

Answer 1

1. If full product cost is used transfer price will be $15.00

Alamosa - since they are already working at full capacity, if they transfer it to tavaris , they will lose the profit so they won't be ready to transfer.

Tavaris - since full product cost is less than second best alternative that is market price , they will be ready to transfer.

2. Transfer price = $15 + 25% = $18.75

Alamosa - won't be ready because still it's less than what they normally gets

Tavaris - since less than market price - will be ready to transfer.

3. Minimum transfer price will be set by Alamosa division , since they have excess capacity now , so fixed cost won't be relevant. They only need variable cost and profit foregone

So minimum price will be

= $9.40 + $6 = $15.40

Maximum Price will be set by tavaris division which will be equal to market price = $21

They would chose to transfer because both are benefiting from it. Excess capacity of Alamosa is utilised , tavaris is getting this at a lessor price than market. Hence both will be ready to transfer.

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