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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Burt Inc. has a number of divisions, including the Indian Division, a producer of liquid pumps, and Maple Division, a manufacturer of boat engines.

Indian Division produces the h20-model pump that can be used by Maple Division in the production of motors that regulate the raising and lowering of the boat engine’s stern drive unit.

The market price of the h20-model is $720, and the full cost of the h20-model is $540.

Required:

  1. 1. If Burt has a transfer pricing policy that requires transfer at full cost, what will the transfer price be? Do you suppose that Indian and Maple divisions will choose to transfer at that price?
  2. 2. If Burt has a transfer pricing policy that requires transfer at market price, what would the transfer price be? Do you suppose that Indian and Maple divisions would choose to transfer at that price?
  3. 3. Now suppose that Burt allows negotiated transfer pricing and that Indian Division can avoid $120 of selling expense by selling to Maple Division. Which division sets the minimum transfer price, and what is it? Which division sets the maximum transfer price, and what is it? Do you suppose that Indian and Maple divisions would choose to transfer somewhere in the bargaining range?

1.

To determine

Calculate the transfer price. Also, describe whether division I and division M should transfer at that price.

Explanation

Transfer Price:

The amount of price charged by the selling department for a component to the purchasing department of a similar company is known as transfer price.

The transfer price of h-20 model will be the full cost of model that is $540. Since the market price of the model is $720 but division M will accept the model at $540...

2.

To determine

Calculate the transfer price if the transfer pricing policy requires the transfer at $720.

3.

To determine

Describe the division which will set the minimum transfer price and the division which will set the maximum transfer price.

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