1. When a division is operating at full capacity, the transfer price to other divisions should
include opportunity costs.
2. When an intermediate market price for a transferred item exists, it represents a lower limit
on the charge that should be made on transfers between divisions.
3. A transfer price is the price charged when one segment of a company provides goods or
services to another segment of the company.
4. When the selling division in an internal transfer has unsatisfied demand from outside
customers for the product that is being transferred, then the lowest acceptable transfer price as
far as the selling division is concerned is:
5. Division X makes a part that it sells to customers outside of the company. Data
concerning this part appear below:
Division Y of the same company would like to use the part manufactured by Division X in one of
its products. Division Y currently purchases a similar part made by an outside company for $70
per unit and would substitute the part made by Division X. Division Y requires 5,000 units of the
part each period. Division X can already sell all of the units it can produce on the outside market.
What should be the lowest acceptable transfer price from the perspective of Division X?
6. Part WY4 costs the Eastern Division of Tyble Corporation $26 to make-direct materials
are $10, direct labor is $4, variable manufacturing overhead is $9, and fixed manufacturing
overhead is $3. Eastern Division sells Part WY4 to other companies for $30. The Western Division
of Tyble Corporation can use Part WY4 in one of its products. The Eastern Division has enough
idle capacity to produce all of the units of Part WY4 that the Western Division would require.
What is the lowest transfer price at which the Eastern Division should be willing to sell Part WY4
to the Central Division?
7. Division P of Turbo Corporation has the capacity for making 75,000 wheel sets per year
and regularly sells 60,000 each year on the outside market. The regular sales price is $100 per
wheel set, and the variable production cost per unit is $65. Division Q of Turbo Corporation
currently buys 30,000 wheel sets (of the kind made by Division P) yearly from an outside supplier
at a price of $90 per wheel set. If Division Q were to buy the 30,000 wheel sets it needs annually
from Division P at $87 per wheel set, the change in annual net operating income for the company
as a whole, compared to what it is currently, would be:
8. Division X makes a part that it sells to customers outside of the company. Data
concerning this part appear below:
Division Y of the same company would like to use the part manufactured by Division X in one of
its products. Division Y currently purchases a similar part made by an outside company for $49
per unit and would substitute the part made by Division X. Division Y requires 5,000 units of the
part each period. Division X has ample excess capacity to handle all of Division Y’s needs without
any increase in fixed costs and without cutting into outside sales. According to the formula in the
text, what is the lowest acceptable transfer price from the standpoint of the selling division?
9. Division A makes a part that it sells to customers outside of the company. Data
concerning this part appear below:
Division B of the same company would like to use the part manufactured by Division A in one of
its products. Division B currently purchases a similar part made by an outside company for $38
per unit and would substitute the part made by Division A. Division B requires 5,000 units of the
part each period. Division A has ample capacity to produce the units for Division B without any
increase in fixed costs and without cutting into sales to outside customers. If Division A sells to
Division B rather than to outside customers, the variable cost be unit would be $1 lower. What
should be the lowest acceptable transfer price from the perspective of Division A?
The Milk Chocolate Division of Mmmm Foods, Inc. had the following operating results last
year:
Milk Chocolate expects identical operating results this year. The Milk Chocolate Division has the
ability to produce and sell 200,000 pounds of chocolate annually.
10. Assume that the Peanut Butter Division of Mmmm Foods wants to purchase an
additional 20,000 pounds of chocolate from the Milk Chocolate Division. Milk Chocolate will be
able to increase its profit by accepting any transfer price above:
12A–9
11. Assume that the Milk Chocolate Division is currently operating at its capacity of 200,000
pounds of chocolate. Also assume again that the Peanut Butter Division wants to purchase an
additional 20,000 pounds of chocolate from Milk Chocolate. Under these conditions, what amount
per pound of chocolate would Milk Chocolate have to charge Peanut Butter in order to maintain
its current profit?
Division X makes a part with the following characteristics:
Division Y of the same company would like to purchase 10,000 units each period from Division X.
Division Y now purchases the part from an outside supplier at a price of $17 each.
12. Suppose Division X has ample excess capacity to handle all of Division Y’s needs without
any increase in fixed costs and without cutting into sales to outside customers. If Division X
refuses to accept the $17 price internally and Division Y continues to buy from the outside
supplier, the company as a whole will be:
12A–11
13. Suppose that Division X is operating at capacity and can sell all of its output to outside
customers. If Division X sells the parts to Division Y at $17 per unit, the company as a whole will
be:
Division A produces a part with the following characteristics:
Division B, another division in the company, would like to buy this part from Division A. Division B
is presently purchasing the part from an outside source at $28 per unit. If Division A sells to
Division B, $1 in variable costs can be avoided.
14. Suppose Division A is currently operating at capacity and can sell all of the units it
produces on the outside market for its usual selling price. From the point of view of Division A,
any sales to Division B should be priced no lower than: