Respuesta :
In case A, the transfer price for Division Y is higher than the purchasing price from outside supplier, hence the transfer supposedly will not happen. In case B, the transfer price for Division Y could be discussed with range of $60 - $74.
Transfer price or transfer cost, is the price used by related parties to transact with each other. However, transfer prices that lower than market value may give advantage to one entity and lowering profits of the other entity. o avoid having one party being disadvantage, transfer price should be calculated using formula:
Transfer price ≥ variable costs + Total contribution margin on lost sales
No. of units transfered
Let's discuss each case we have.
Case A
In case A, we know that variable costs can be deducted by $3 per unit for intracompany selling. Hence:
Variable costs per unit _$70_
Less: Avoidable cost __$3___
Since the total production capacity is fully equiped for fulfill outside's ourder, hence division X has to lost some of its outside's sales and reallocate the production capacity for Division Y's needs. Hence the contribution margin on lost sales are = $90 - $70
Total contribution margin on lost sales _$20_
No. of units transferred _40,000___
The transfer price for Case A should be greater than or equal to:
Transfer price = ($70-$3) + ($20 x 40,000)/40,000
Transfer price greather than or equal to __$87___
The transfer price should be greather than or equal to $87 which is higher than Division Y's purchase price from outside supplier. Hence this transfer will not likely to take place.
Case B
We know that there is no deduction on variable cost for intercompany sales in this case, hence:
Variable costs per unit _$60____
Less: Avoidable cost __$0___
Unlike in case A, in case B not all of Division X's production capacity is used since the ouside demand is only 160,000. Hence, Division X could allocate the remaining idle capacity for producing Divsion Y's demand. In this case, Division X will not loss any outside sales.
Total contribution margin on lost sales _$0____
No. of units transferred _40,000___
The transfer price for Case B should be greater than or equal to:
Transfer price = ($60-$0) + ($0x40,000)/40,000
Transfer price greather than or equal to _$60_
The transfer price in case B should be in range of $60 - $74 for the transaction to take place.
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Complete Question:
In each cases below assume that Division X has a product that can be sold either to outside customers or to Division Y of the same company for use in its production process. The managers of the divisions are evaluated based on their divisional profit.
(Please refer to the table attached below)
Required:
1.a Refer to the data in case A above. Assume in this case that $3 per unit in variable selling costs can be avoided on intracompany sales. Determine the transfer price for the selling division.
Variable costs per unit _____
Less: Avoidable cost _____
Total contribution margin on lost sales _____
No. of units transferred ____
Transfer price greather than or equal to _____
1.b Refer to data in case B above. In this case, there will be no savings in variable costs on intracompany sales. Determin the trasfer price for the selling division.
Variable costs per unit _____
Less: Avoidable cost _____
Total contribution margin on lost sales _____
No. of units transferred ____
Transfer price greather than or equal to _____
