Transfer pricing, perfect and imperfect markets. Letang Company has three divisions (R, S, and T), organized as decentralized profit centers. Division R produces the basic chemical Ranbax, in multiples of 1,000 pounds, and transfers it to divisions S and T. Division S processes Ranbax into the final product Syntex, and division T processes Ranbax into the final product Termix. No material is lost during processing. Division R has no fixed costs. The variable cost per pound of Ranbax is $0.18. Division R has a capacity limit of 10,000 pounds. Divisions S and T have capacity limits of 4,000 and 6,000 pounds, respectively. Divi- sions S and T sell their final product in separate markets. The company keeps no inventories of any kind. The cumulative net revenues (i.e., total revenues – total processing costs) for divisions S and T at vari- ous output levels are summarized below. Division S Pounds of Ranbax processed in S Total net revenues ($) from sale of Syntex 4,000 $1,100 $1,200 1,000 2,000 3,000 $ 500 $ 850 Division T Pounds of Ranbax processed in T Total net revenues ($) from sale of Termix $600 6,000 $2,350 1,000 2,000 3,000 4,000 $1,800 $2,100 $2,250 5,000 $1,200

Transfer pricing, perfect and imperfect markets. Letang Company has three divisions (R, S, and T), organized as decentralized profit centers. Division R produces the basic chemical Ranbax, in multiples of 1,000 pounds, and transfers it to divisions S and T. Division S processes Ranbax into the final product Syntex, and division T processes Ranbax into the final product Termix. No material is lost during processing. Division R has no fixed costs. The variable cost per pound of Ranbax is $0.18. Division R has a capacity limit of 10,000 pounds. Divisions S and T have capacity limits of 4,000 and 6,000 pounds, respectively. Divi- sions S and T sell their final product in separate markets. The company keeps no inventories of any kind. The cumulative net revenues (i.e., total revenues – total processing costs) for divisions S and T at vari- ous output levels are summarized below. Division S Pounds of Ranbax processed in S Total net revenues ($) from sale of Syntex 4,000 $1,100 $1,200 1,000 2,000 3,000 $ 500 $ 850 Division T Pounds of Ranbax processed in T Total net revenues ($) from sale of Termix $600 6,000 $2,350 1,000 2,000 3,000 4,000 $1,800 $2,100 $2,250 5,000 $1,200

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter10: Evaluating Decentralized Operations

Section: Chapter Questions

Problem 4CMA: Morrisons Plastics Division, a profit center, sells its products to external customers as well as to...

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Spark Ltd has two divisions, assembly and electrical. The assembly division transfers partially completed components to the electrical division at a predetermined transfer price. The assembly division’s standard variable production cost per unit is $550. This division has spare capacity, and it could sell all its components to outside buyers at $680 per unit in a perfectly competitive market. Required: a) Determine a transfer price using the general rule. b) How would the transfer price change if the assembly division had no spare capacity? c) What transfer price would you recommend if there was no outside market for the transferred component and the assembly division had spare capacity? d) Explain how negotiation between the supplying and buying units may be used to set transfer prices. How does this relate to the general transfer pricing rule? (\ maximum 200 words)