Appendix 11A
Transfer Pricing
Exercise 11A-1 (30 minutes)
1. a. The lowest acceptable transfer price from the perspective of the
selling division is given by the following formula:
Total contribution margin
on lost sales
Variable cost
Transfer price +
per unit Number of units transferred
³
Because there is enough idle capacity to fill the entire order from the
Hi-Fi Division, no outside sales are lost. And because the variable cost
per unit is $42, the lowest acceptable transfer price as far as the
selling division is concerned is also $42.
$0
Transfer price $42 + = $42
5,000
³
b. The Hi-Fi division can buy a similar speaker from an outside supplier
for $57. Therefore, the Hi-Fi Division would be unwilling to pay more
than $57 per speaker.
£Transfer price Cost of buying from outside supplier = $57
c. Combining the requirements of both the selling division and the
buying division, the acceptable range of transfer prices in this
situation is:
££$42 Transfer price $57
Assuming that the managers understand their own businesses and
that they are cooperative, they should be able to agree on a transfer
price within this range and the transfer should take place.
d. From the standpoint of the entire company, the transfer should take
