Question

San Jose Company operates a Manufacturing Division and an Assembly Division. Both divisions are evaluated as profit centers. Assembly buys components from Manufacturing and assembles them for sale. Manufacturing sells many components to third parties in addition to Assembly. Selected data from the two operations follow.

     

	Manufacturing			Assembly
Capacity (units)		420,000			220,000
Sales pricea	$	440		$	1,400
Variable costsb	$	260		$	520
Fixed costs	$	40,200,000		$	24,200,000

  

^a For Manufacturing, this is the price to third parties.

^b For Assembly, this does not include the transfer price paid to Manufacturing.
  

Suppose Manufacturing is located in Country A with a tax rate of 70 percent and Assembly in Country B with a tax rate of 30 percent. All other facts remain the same.

Required:

a. Current production levels in Manufacturing are 220,000 units. Assembly requests an additional 60,000 units to produce a special order. What transfer price would you recommend?

b. Suppose Manufacturing is operating at full capacity. What transfer price would you recommend?

c. Suppose Manufacturing is operating at 390,000 units. What transfer price would you recommend?

Answer 1

ANSWER:

	TRANSFER PRICE
a	$260
b	$440
c	$350

Explanation:

a	Manufacturing is not utilizing full capacity. So, Variable price is the optimal transfer price
b	Manufacturing is utilizing full capacity. So, Market Cost is the optimal transfer price
c	At Variable Cost (30000*260)	$7,800,000
	At Market Price (30000*440)	$13,200,000
	Total (1)	$21,000,000
	Units Sold (2)	$60,000
	Transfer Price (1/2)	$350

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Answer 2

420,000-390,000= 30,000