Chapter 15 – Transfer Pricing
15–21
15–36. (40 min.) Evaluate transfer price system: Western States Supply.
a. Northwest division management’s attitude at the present time should be positive to
each of these prices in decreasing order (obviously preferring a higher to lower price)
because Northwest has unused capacity. Northwest division management
division management would no longer have complete control of profits. Also, the
Chapter 15 – Transfer Pricing
15–37. (30 min.) Transfer Prices and Tax Regulations—Ethical Issues: Gage
Corporation.
a. The transfer price economically optimal for Gage Corporation is $12 per unit. As
illustrated below, this is due to the difference in tax rates between the U.S. and
England. It would thus be advantageous to Gage to charge as high a transfer price as
Adams Division, U.S.
Bute Division, England
Selling Price ……………………………..………………..
Transfer Price …………………………..
$5
Transfers from U.S. …………………..………
$5.00
Variable Cost ……….………………….
5
Shipping costs …………………………..
3.00
Profit ………………..…………
$0
Additional processing costs ………..………………..
2.00
Profit before tax ………………………..…
Tax @ 70% ………………………………………………..
Profit after tax ………………………..…
Transfer Price …..………………………
Selling Price ……………………………………………….
Variable Cost …………………………..
Transfers from U.S. …………………………..
Profit …………….…………….
Shipping costs ………………………..…
Tax @ 40% …………………………..
Additional processing costs ………………………….
Profit after tax …..………………………
Profit before tax …………………………..
$ 6.00
Tax @ 70% …………………………….………………….
Chapter 15 – Transfer Pricing
15–23
15–38. (40 min.) Segment Reporting: Midwest Entertainment.
a. ($ thousands)
Bus
Charters
Lodging
Concerts
Ticket
Services
Outside revenue …………………………..
$12,250
$5,300
$4,450
$1,600
Hotel award coupons ……..……………………
1,300
Concert discounts (bus) …………………………..
350
Concert discounts
(Lodging) ……………………..……
150
Crew lodging …………………………..
650
Ticket commissions:
Bus …………………………..…………………………..
200
Lodging …………………….…….
100
Concerts …………………………..
50
Total revenues …………………………..
$13,550
$5,950
$4,950
$1,950
Outside costs ………………..…………
$7,850
$3,550
$3,300
$1,500
Hotel award coupons ……..……………………
1,300
Concert discounts (bus) …………………………..
350
Concert discounts
(Lodging) ……………………..……
150
Crew lodging …………………………..
650
Ticket commissions:
Bus …………………………..…………………………..
200
Lodging …………………….…….
100
Concerts …………………………..
50
Total costs …………………………..
$9,050
$5,100
$3,350
$1,500
Operating profits …………………………..
$4,500
$ 850
$1,600
$ 450
Chapter 15 – Transfer Pricing
15–24
15-38. (continued)
b. Adjust the operating profits in requirement a for the changed transfer prices.
Bus Charters
Lodging
Concerts
Ticket
Services
Operating profits (a) …………………………..
$4,500
$850
$1,600
$450
Hotel awards …………………………..
(1,050)a
1,050
Concert discounts ………..…………………
300b
(300)
Operating profits (b) …………………………..
$3,750
$1,900
$1,300
$450
a $1,050 = $1,300 retail value – $250 differential cost.
b $300 = $350 retail value – $50 differential cost.
c. Divide the operating profits in requirements a and b by division assets, which are given
For (a):
Ticket services ……………………..……
13.85%
=
($450 ÷ $3,250)
Concerts ……………………………..………………….
9.97
=
($1,600 ÷ $16,050)
Bus……………………………………..………………..
9.42
=
($4,500 ÷ $47,750)
Lodging ……………………………….………………….
4.42
=
($850 ÷ $19,250)
For (b):
Ticket services ……………………..……
13.85%
=
($450 ÷ $3,250)
Lodging ……………………………….………………….
9.87
=
($1,900 ÷ $19,250)
Concerts ……………………………..………………….
8.10
=
($1,300 ÷ $16,050)
Bus……………………………………..………………..
7.85
=
($3,750 ÷ $47,750)
Chapter 15 – Transfer Pricing
15–39. (20 min.) Two-Part Transfer Prices: Mathes Corporation.
a.
Mathes should transfer at the Landfill’s variable cost of receiving and processing the
material. Because the Landfill has excess capacity after satisfying all market demand that
exists for its services, accepting loads from plants does not cause it to forgo any “profits”
Chapter 15 – Transfer Pricing
15–41. (20 min.) Two-Part Transfer Prices: CHS.
a.
This is a complicated problem, because of the requirement for a new server that would not
exist without the demands of Optics. (It is made less complicated by the fact that Health
Services leases the machine.) There is excess capacity on the machine, so the optimal
Chapter 15 – Transfer Pricing
15–27
15–41. (continued)
c.
Fixed fee …………………………..
$21,000
Variable costs ………………..…………
(100 hours x $1)
100
Total transfer costs ……….………………….
$21,100
Average hourly cost ………..…………………
($21,100 ÷ 100 hours)
$211.00 per hour
15–42. (20 min.) Two-Part Transfer Prices: CHS.
a.
This case is much simpler. The optimal transfer price is $30 per hour, the market price.
Chapter 15 – Transfer Pricing
15–28
15–43. (60 min.) Custom Freight Systems (A): Transfer Pricing.
a. The Logistics division should accept the bid from Forwarders division. Custom Freight
Systems is $72 (= $185 – $113) better off if the Logistics division uses the Forwarders
division for this contract. See detail calculations below.
Option I: Purchase Internally
Air Cargo
Division
Forwarders
Division
Logistics
Division
Sales revenue ……………………………….
$155
$ 210
–0–
Variable Costs ……………………………….
($155 x 60%) …………………………..
93
($175 – $155) …………………………
20
(From Forwarders Div.) …………….
155
(Given) …………………………..……..
$210
Operating Profit (Cost)…………………….
$ 62
$ 35
$(210)
Total Company Cost ……………………….
$(113
)
arises as to the appropriate transfer price. The economic transfer pricing rule for
making transfers to maximize a company’s profits is to transfer at the differential outlay
cost to the selling division plus the opportunity cost to the company of making the
internal transfers.
Differential
Outlay Cost
+
Opportunity Cost of
Transferring Internally
=
Transfer
Price
If the seller (the division
supplying the goods or
services) has idle capacity ………………
$175
+
$ 0
=
$175
If the seller has no idle capacity ……….
$175
+
$35
=
$210
($210 selling price –
$175 variable cost)
Chapter 15 – Transfer Pricing
15–29
15–43. (continued)
c. Espinosa has many alternatives to intervention or to forcing the manager of the
Forwarders division to lower his price below $210. Each has advantages and
disadvantages.
Chapter 15 – Transfer Pricing
15–44. (30 min.) Custom Freight Systems (B): Transfer Pricing.
Similar to Case A, the Logistics division should accept the bid from the Forwarders
division. However, if we eliminate the Forwarders Division from the bidding process, the
bid from World should be accepted. Emphasize that even though World’s bid is $10 per
hundred pounds higher than United’s, the overall cost to Custom Freight Systems is lower