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Transfer pricing The materials used by the Multinomah Division of Isbister Company are currently purchased from outside suppliers at $90 per unit. These same materials are produced by the Pembroke Division. The Pembroke Division can produce the materials needed by the Multinomah Division at a variable cost of $75 per unit. The division is currently producing 120,000 units and has capacity of 150,000 units. The two divisions have recently negotiated a transfer price of $82 per unit for 15,000 units. By how much will each division’s income increase as a result of this transfer?

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 24, Problem 24.6BPE
Textbook Problem

Transfer pricing

 The materials used by the Multinomah Division of Isbister Company are currently purchased from outside suppliers at $90 per unit. These same materials are produced by the Pembroke Division. The Pembroke Division can produce the materials needed by the Multinomah Division at a variable cost of $75 per unit. The division is currently producing 120,000 units and has capacity of 150,000 units. The two divisions have recently negotiated a transfer price of $82 per unit for 15,000 units. By how much will each division’s income increase as a result of this transfer?

Expert Solution
To determine

Transfer price: The price charged for the goods and services transferred among the divisions is referred to as transfer price.

Approaches for setting transfer prices:

  • Market price approach
  • Negotiated price approach
  • Cost price approach

To determine: The increase in P Division’s and M Division’s income from operations as a result of transfer pricing

Explanation of Solution

Determine the increase in P Division’s income from operations as a result of transfer pricing.

Increase in P Division’s income from operations} = {(Transfer price–Variable cost per unit) × Number of units transferred}($82–$75) × 15,000 units= $105,000

Note: P Division is the supplying division. So, the supplying or selling division negotiates to sell at a price not less than the variable expenses

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Chapter 24 Solutions

Accounting
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