Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 40

Custom Freight Systems (B): Transfer Pricing

Assume that all of the information is the same as in Integrative Case 15-39, but instead of receiving only one outside bid, Logistics receives two. The new bid is from World Services for $195 per hundred pounds. World has offered to use Air Cargo for transporting packages. Air Cargo will charge World $155 per hundred pounds. The bids from Forwarders and United Systems remain the same as in Integrative Case 15-39, $210 and $185, respectively.

Required

Which bid should Logistics Division take? Why?

Step 1 of 4

The summery of question is; Logistics divisions invited bids for a supply. In this regard Logistics Division received three bids, one from its internal division, the forwarders @ $ 210 per hundred pounds, $ 185 per hundred pounds from United Systems and $ 195 per hundred pounds from World Services.

However if we look at it from the company’s perspective, the company is having following cost incidences:

1. Variable cost of Air Cargo is 60 % of the fare which is $ 155. Hence the variable cost of air cargo is $ 93.

2. There are further incremental costs of $ 20 at the forwards division.

3. This makes the total variable costs of $ 113 per hundred pounds for the company.