Transfer Pricing Problems

Transfer Pricing Problems, i learned this topic last semester too, in AFF 5100, but I think it was more complex than what I learn in BAO3312. different level...

the case study in this topic was about the calculation, so I just post one sample answer.


As per problems in text:

Problem 1 – Lambda Company p.248

For Product X:

Standard cost =Material Purchased Outside+ Direct labor +Variable overhead+ Fixed overhead per unit=2+1+1+3=7

10 percent return on inventories and fixed assets=0.1×[（30,000+70,000）/10,000]=1

Transfer price=7+1=8

For Product Y:

Standard cost= Material Purchased Outside+ Direct labor +Variable overhead+ Fixed overhead per unit+ Transfer price of X=3+1+1+4+8=17

10 percent return on inventories and fixed assets=0.1×[（15,000+45,000）/10,000]=0.6

Transfer price=17+0.6=17.6

For Product Z:

Standard cost= Material Purchased Outside+ Direct labor +Variable overhead+ Fixed overhead per unit+ Transfer price of Y=1+2+2+1+17.6=23.6

Problem 2 - Lambda Company (with additional information) p.248

For Product X:

Standard variable cost =Material Purchased Outside+ Direct labor +Variable overhead =2+1+1=4

Monthly charge=fixed costs+10 percent return on inventories and fixed assets=3+0.1×[（30,000+70,000）/10,000]=4

Transfer price=4+4=8

For Product Y:

Standard variable cost =Material Purchased Outside+ Direct labor +Variable overhead+ Transfer price of X =3+1+1+8=13

Monthly charge=fixed costs+ 10 percent return on inventories and fixed assets=4+0.1×[（15,000+45,000）/10,000]=4.6

Transfer price=13+4.6=17.6

Unit standard cost = Variable cost+ Fixed cost= 13+4=17

For Product Z:

Standard cost =Material Purchased Outside+ Direct labor +Variable overhead+ Fixed overhead per unit+ Transfer price of Y=1+2+2+1+17.6=23.6

Problem 3 – Lambda Company (with additional information) p.248

a. With transfer price calculated in Problem 1, is Division C better advised to maintain its price at $28 or follow competition in each of the instances above?

Under possible competitive price $27.00

If company maintain the price at $28, the profit=(28-23.6) ×9,000=39,600

If company follow the possible competitive price at $27, the profit= (27-23.6) ×10,000=34,000

Under possible competitive price $26.00

If company maintain the price at $28, the profit=(28-23.6) ×7,000=30,800

If company follow the possible competitive price at $26, the profit= (26-23.6) ×10,000=24,000

Under possible competitive price $25.00

If company maintain the price at $28, the profit=(28-23.6) ×5,000=22,000

If company follow the possible competitive price at $25, the profit= (25-23.6) ×10,000=14,000

Under possible competitive price $23.00

If company maintain the price at $28, the profit=(28-23.6) ×2,000=8,800

If company follow the possible competitive price at $23, the profit= (23-23.6) ×10,000=-6,000

Under possible competitive price $22.00

If company maintain the price at $28, the profit=(28-23.6) ×0=0

If company follow the possible competitive price at $22, the profit= (22-23.6) ×10,000=-16,000

So, no matter how much is the possible competitive price, when the company maintain its price at $28.00, it can get more profit than follow the possible competitive price.

b. With the transfer prices calculated in Problem 2, is Division C better advised to maintain its present price at $28.00 or to follow competition in each of the instances above?

Because the answer to the Problem 2 is the same as the answer to the Problem 1, so the answer to this question is the same as the question 3 (a).

Maintaining the price at $28.00, the company can get more profit.

c. Which decisions are to the best economic interests of the company, other things being equal?

From the question 3 (a) and 3 (b), no matter which method the company use to calculate the cost, when the company maintains the price at $28.00, the company can maximum the profit.

d. Using the transfer prices calculated in Problem 1, is the manager of Division C making a decision contrary loss to the company in each of the competitive pricing actions described above?

No. The goal to the company is maximum its profit, and as our calculated, when the company maintains its price at $28.00, it can get the most profit, so the manager has acted in the best interest of the company.

If the company follows the competitive price, the opportunity losses are shown as followed:

1. The possible competitive price is $27.00, opportunity loss=39,600-34,000=5,600

2. The possible competitive price is $26.00, opportunity loss=30,800-24,000=6,800

3. The possible competitive price is $25.00, opportunity loss=22,000-14,000=8,000

4. The possible competitive price is $23.00, opportunity loss=8,800-(-6,000)=14,800

5. The possible competitive price is $22.00, opportunity loss=0-(-16,000)=16,000