Transfer Pricing Scenarios. Question 1: Delta Manufacturing Company two divisions in Ontario Division Two buys a part (10,000 units) from Division One.

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Presentation transcript:

Transfer Pricing Scenarios

Question 1: Delta Manufacturing Company two divisions in Ontario Division Two buys a part (10,000 units) from Division One for $16 per unit. Division One has purchased new equipment and wants to increase the price to Division Two to $18 per unit. – variable costs of $12 per unit produced – Fixed costs with the recent purchase of equipment are $5 per unit The controller of Division Two claims that she cannot afford to go that high, as it will decrease their profit to near zero. – Can buy the part from an outside supplier for $16 per unit.

Scenario 1: Assume Division One has no alternative use for its facilities. What is the optimal source decision? [a] for the company as a whole? [b] for Division Two?

Template Buy internallyBuy ExternallyDifference Division One Revenue Variable Costs Fixed Costs Division Profit Division Two Cost for part Whole Company

Scenario 2: Assume Division One can use its facilities to create an additional $ 45,000 in CM. What is the optimal source decision? [a] for the company as a whole? [b] for Division Two?

Template Buy internallyBuy ExternallyDifference Division One Revenue Variable Costs Fixed Costs Division Profit Division Two Cost for part Whole Company

Scenario 3: If Division One has no alternative uses for its facilities and the external supplier drops the price to $11 per unit, What is the optimal source decision: [a] for the company as a whole? [b] for Division Two?

Template Buy internallyBuy ExternallyDifference Division One Revenue Variable Costs Fixed Costs Division Profit Division Two Cost for part Whole Company

Question 2: Harrison Ltd Assume the information as shown with respect to Cumberland Beverages and Pizza Place (both companies are owned by Harrison Ltd).

Harrison Ltd – An Example If Cumberland Beverages has sufficient idle capacity (3,000 barrels) to satisfy Pizza Place’s demands (2,000 barrels), without sacrificing sales to other customers, then the lowest and highest possible transfer prices are computed as follows: Selling division’s lowest possible transfer price: Buying division’s highest possible transfer price:

Harrison Ltd – An Example If Imperial Beverages has no idle capacity (0 barrels) and must sacrifice other customer orders (2,000 barrels) to meet Pizza Maven’s demands (2,000 barrels), then the lowest and highest possible transfer prices are computed as follows: Selling division’s lowest possible transfer price: Buying division’s highest possible transfer price:

Harrison Ltd – An Example If Imperial Beverages has some idle capacity (1,000 barrels) and must sacrifice other customer orders (1,000 barrels) to meet Pizza Maven’s demands (2,000 barrels), then the lowest and highest possible transfer prices are computed as follows: Buying division’s highest possible transfer price: Selling division’s lowest possible transfer price: