Appendix 12A
Transfer Pricing
Exercise 12A-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
selling division is concerned is also $42.
$0
Transfer price $42 + = $42
5,000
³
£Transfer price Cost of buying from outside supplier = $57
c. Combining the requirements of both the selling division and the
Exercise 12A-1 (continued)
2. a. Each of the 5,000 units transferred to the Hi-Fi Division must displace
as follows:
( )
( )
$60 – $42 × 5,000
Transfer price $42 + 5,000
= $42 + $60 – $42 = $60
³
per speaker.
c. The requirements of the selling and buying divisions in this instance
are incompatible. The selling division must have a price of at least
d. From the standpoint of the entire company, the transfer should not
Solutions Manual, Appendix 12A 53
Exercise 12A-2 (20 minutes)
1.
Division A
Total
Company
Sales ……………………….
$2,500,0001
$3,200,0003
Expenses:
Added by the division..
1,800,000
2,200,000
Transfer price paid ……
Total expenses …………..
1,800,000
2,200,000
Net operating income ….
$ 700,000
$1,000,000
120,000 units × $125 per unit = $2,500,000.
24,000 units × $300 per unit = $1,200,000.
3Division A outside sales
(16,000 units × $125 per unit) ………………..
$2,000,000
Division B outside sales
(4,000 units × $300 per unit) ………………….
1,200,000
Total outside sales ………………………………….
$3,200,000
Note that the $500,000 in intracompany sales have been eliminated.
2. Division A should transfer the 1,000 additional circuit boards to Division
Division A transfers the 1,000 additional boards to Division B.
Exercise 12A-3 (20 minutes)
1. 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
Exercise 12A-3 (continued)
2. In this case, Division X has enough idle capacity to satisfy Division Y’s
demand. Therefore, there are no lost sales and the lowest acceptable
56 Managerial Accounting for Managers, 4th Edition
Problem 12A-4 (60 minutes)
1. The lowest acceptable transfer price from the perspective of the selling
division is given by the following formula:
+ ³Total contribution margin on lost sales
Variable cost
Transfer price per unit Number of units transferred
The Pulp Division has no idle capacity, so transfers from the Pulp
outsiders. This is confirmed below:
($70 – $42) × 5,000
Transfer price $42 + = $42 + ($70 – $42) = $70
5,000
³
Therefore, the Pulp Division will refuse to transfer at a price less than
The Carton Division can buy pulp from an outside supplier for $70 a ton,
Cost of buying from outside supplier = $63£Transfer price
The requirements of the two divisions are incompatible. The Carton
and no transfer will take place.
2. The price being paid to the outside supplier, net of the quantity
discount, is only $63. If the Pulp Division meets this price, then profits in
per year:
Lost revenue per ton ……………………….
$70
Outside supplier’s price …………………….
$63
Loss in contribution margin per ton …….
$7
Number of tons per year …………………..
× 5,000
Total loss in profits ………………………….
$35,000
Solutions Manual, Appendix 12A 57
Problem 12A-4 (continued)
3. The Pulp Division has idle capacity, so transfers from the Pulp Division
to the Carton Division do not cut into normal sales of pulp to outsiders.
following calculation:
$0
Transfer price $42 + = $42
5,000
³
transfer price within the range:
££$42 Transfer price $63
Pulp Division’s $60 “full cost” per unit, it is within the range given in Part
potential profits:
Price per ton ……………………………………
$59
Variable costs …………………………………..
42
Contribution margin per ton ………………..
$17
company as a whole.
5. No, the Carton Division should probably be free to go outside and get
58 Managerial Accounting for Managers, 4th Edition
Problem 12A-4 (continued)
6. The Pulp Division will have an increase in profits:
Selling price …………………………..………….
$70
Variable costs …………………………………….
42
Contribution margin per ton ………………….
$28
The Carton Division will have a decrease in profits:
Inside purchase price …………………………..
$70
Outside purchase price …………………………
59
Increased cost per ton …………………………
$11
The company as a whole will have an increase in profits:
Increased contribution margin in the Pulp Division ………
$28
Decreased contribution margin in the Carton Division…..
11
Increased contribution margin per ton ……………………..
$17
a question of
fairness
as to how these profits should be split between
enhances the profits of the Pulp Division.
Solutions Manual, Appendix 12A 59
Problem 12A-5 (45 minutes)
2. If both the Cabinet Division and the Quark Division have idle capacity,
potential contribution margin per set:
Price offered per set …………………………..
$340
Less variable costs per set:
Cabinet Division ………………………………
$ 70
Quark Division ………………………………..
210
280
Potential contribution margin per set ……..
$ 60
for $340.
Price offered per set ………………………………………
$340
Less:
Lost revenue from sales of cabinets to outsiders ..
$140
Variable cost of Quark Division ………………………
210
350
Net loss per TV …………………………………………….
($ 10)
60 Managerial Accounting for Managers, 4th Edition
Problem 12A-5 (continued)
consequence, the manager of the buying division should be motivated
to make decisions that are in the best interests of the company.
When the selling division has idle capacity, the cost to the company of
above.