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

Exercise 23

Transfer Pricing Policies: Ethical Issues

Refer to the data in Exercise 15-16. Suppose that Government Division will charge the client interested in implementing an activity-based costing system by the hour based on cost plus a fixed fee, where the cost is primarily the consultant’s hourly pay. Assume also that Government Division cannot hire additional consultants. That is, if it is to do this job, it will need to use a consultant from Corporate Division.

Required

a. What is the minimum transfer price that Corporate Division should obtain for its services, assuming that it is operating at capacity? Would this be an ethical price to charge the Government client? Explain.

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b. What is the transfer price you would recommend if Corporate Division was not operating at capacity? Would this be an ethical price to charge the Government client? Explain.

Step 1 of 3

Transfer pricing

Transfer pricing is the amount charged by one business unit of a company to another business unit for the products supplied. Each business unit is considered as separate responsibility centers and sale from one business unit to another business unit is consider as sale to an outsider. The sales based on transfer pricing are recorded in the accounting books of a firm and transfer prices are used for decision making, merchandise costing and performance assessment.