Chapter 11.A, Problem 3E

EXERCISE 11A-3 Transfer Pricing Situations LO11-5

In each of the cases below, assume 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 profits.

Required:

1. 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.
1. What is the lowest acceptable transfer price from the perspective of the selling division?
2. What is the highest acceptable transfer price from the perspective of the buying division?
3. What is file range of acceptable transfer prices (if any) between the two divisions¹ If the managers are free to negotiate and make decisions on their own, will a transfer probably take place? Explain.
2. Refer to the data in case B above. In this case, there will be no savings in variable selling costs on intracompany sales, a What is the lowest acceptable transfer price from the perspective of the selling division?
1. What is the highest acceptable transfer price from the perspective of the buying division?
2. What is the range of acceptable transfer prices (if any) between the two divisions? If the managers are free to negotiate and make decisions on their own, will a transfer probably take place? Explain.