Transfer Pricing and Responsibility Centers Discussion
Transfer Pricing and Responsibility Centers Discussion
Three divisions of a CMI are involved in a dispute. Division A purchases Part 101 and Division B purchases Part 201 from a third division, C. Both divisions need the parts for products that they assemble. The intercompany transactions have remained constant for several years.
Recently, outside suppliers have lowered their prices, but Division C refuses to do so. In addition, all division managers are feeling the pressure to increase profit. Managers of divisions A and B would like the flexibility to purchase the parts they need from external parties at a lower cost and increase profitability.
The current pattern is that
Division A purchases 2,700 units of product part 101 from Division C (the supplying division) and another 1,300 units from an external supplier.
Division B purchases 1,100 units of Part 201 from Division C and another 700 units from an external supplier.
Note that both divisions A and B purchase the needed supplies from both the internal source and an external source at the same time.
The managers for divisions A and B are preparing a new proposal for consideration.
Division C will continue to produce Parts 101 and 201. All of its production will be sold to Divisions A and B. No other customers are likely to be found for these products in the short term, given that supply is greater than demand in the market.
Division A will buy 2,000 units of Part 101 from Division C at the existing transfer price; and
2,000 units from an external supplier at the market price of $900 per unit.
Division B will buy 900 units of Part 201 from Division C at the existing transfer price; and
900 units from an external supplier at $1,800 per unit.
Division C Data Based on the Current Agreement
Part 101 201
Annual volume (units) 2,700 1,100
Transfer price/unit $1,000 $2,000
Variable expenses/unit $700 $1,200
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