Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 34

Transfer Pricing; Decision Making Daniels Inc., which manufactures sports equipment, consists of several operating divisions. Division A has decided to go outside the company to buy materials since division B informed it that the division’s selling price for the same materials would increase to $200. Information for division A and division B follows:

Outside price for materials	$150
Division A’s annual purchases	10,000 units
Division B’s variable costs per unit	$140
Division B’s fixed costs, per year	$1,250,000
Division B’s capacity utilization	100%

Required

1. Will the company benefit if division A purchases outside the company? Assume that division B cannot sell its materials to outside buyers.

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2. Assume that division B can save $200,000 in fixed costs if it does not manufacture the material for division A. Should division A purchase from the outside market?

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3. Assume the situation in requirement 1. If the outside market value for the materials drops $20, should A buy from the outside? Explain.

Step 1 of 4

Transfer pricing is the price calculation approach where the good is been sold from one unit to another unit of same firm. There are different methods to calculate transfer pricing like variable cost method, full cost method, market price method, etc.