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) 400,000 200,000 Sales pricea $ 400 $ 1,300 Variable costsb $ 160 $ 480 Fixed costs $
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) | 400,000 | 200,000 | ||||
| Sales pricea | $ | 400 | $ | 1,300 | ||
| Variable costsb | $ | 160 | $ | 480 | ||
| Fixed costs | $ | 40,000,000 | $ | 24,000,000 | ||
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 60 percent and Assembly in Country B with a tax rate of 40 percent. All other facts remain the same.
Required:
a. Current production levels in Manufacturing are 200,000 units. Assembly requests an additional 40,000 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 380,000 units. What transfer price would you recommend?
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When it is related to transfer price,
(a) When the full capacity is not utilized, then variable price ($160) shall be the optimal transfer price
(b) when the full capacity is utilized, then market cost ($400) shall be the optimal transfer price.
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