Understanding Transfer Pricing: Key Concepts and Implications
School
Montana State University**We aren't endorsed by this school
Course
ACCT 307
Subject
Economics
Date
Dec 12, 2024
Pages
2
Uploaded by KidCaribouPerson881
GOALS AND OBJECTIVESTo understand what transfer pricing is and WHY it is important.To understand the decision-making, evaluation and tax implications of transfer pricing decisionsTo understand the basic ways in which transfer prices are arrived at.To understand the advantages and disadvantages of the different transfer-pricing models and theconditions where they are most appropriateTo understand the effect of capacity on transfer prices.QUESTIONS TO CONSIDER IN PREPARATION FOR THE CLASSWhat general rules could we make about the applicability of market-based and cost-based transferprices, as they relate to available capacity in the producing division?In what ways are transfer-pricing decisions SIMILAR to other tactical decision making that we havestudied in Managerial and Cost Accounting?In a negotiated transfer-price situation, what QUALITATIVE factors might come into play that couldaffect the final transfer price?Besides the buying and supplying divisions, who else might be keenly interested in the transfer pricethat is arrived at?RHODE ISLAND CORPORATION…… has two divisions, A and B, which manufacture bicycles. Division A produces the bicycle frame, and Division B assembles the rest of the bicycle. There is a market for both the bicycle frame produced by Division A, and the final product. Each division is treated as a profit centerand have complete autonomy in setting transfer prices and in deciding how much, if any, units to produce.The transfer price for the bicycle frame has been set by company headquarters at the current market priceof $200. This is the same price that Division B would have to pay on the open market, if it wished to obtain the frames elsewhere, versus getting them from Division A.The following data is available for normal production of both frames and completed bicycles:Selling price for the bicycle$300Selling price for bicycle frame200Variable cost per unit in Division A120Fixed cost per unit in Division A150Variable cost per unit in Division B150Fixed cost per unit in Division B130The manager of Division B has made the following calculation for his division:Selling price for bicycle$300Transferred-in cost per unit (market price)$200Variable cost per unit in Division B150350Profit (loss) on bicycle($50)Required:1.There are several types of strategic business units (SBUs) based on what is controllable by the units. For example, there are cost centers, revenue centers, profit centers and investment centers. What is the difference between these?2.In this problem the 2 divisions are profit centers. How might this impact transfer pricing?3.Generally, what are three major ways that transfer prices can be determined?
Assume that no idle capacityexists in Division A for parts 4 through 84.As manager of Division B, who has complete autonomy in transfer price situations, would you acceptthe bicycle from Division A at the market price transfer price? Why or why not?5.Would the company as a whole want Division B to accept the bicycle from Division A? Why or why not?6.Would the manager of Division A want the bicycle frame to be transferred to Division B? Why or why not?7.What would be the minimum price that Division A would accept in order to make this transfer? Whatis the largest amount that Division B is willing to pay?8.What if there were costs savings to Division A of $25 per unit if they transferred the units internally. NOW what would be their minimum acceptable price?9.Based on your answers to 4 through 8, which method of determining transfer prices would seem to work best – cost based or market based?NOW, for parts 7 – 11, ASSUME that Division A has idle capacity.10. As a manager of Division B, would you accept the bicycle frame from Division A at the market price?Why or why not?11. Would the company as a whole want Division B to accept the bicycle from Division A? Why or why not?12. Would the manager of Division A want the bicycle frame to be transferred to Division B at the marketprice? Why or why not?13. What would be the minimum price that Division A would accept in order to make this transfer? Whatis the largest amount that Division B is willing to pay?14.ASSUME FOR THIS QUESTION ONLYthat there are costs savings to Division A of $25 per unit if they transferred the units internally. NOW what would be their minimum acceptable price?15. What happens if the transfer price is set at $150 per unit? Is there now a balance between goal congruence and autonomy? (That is, can the divisions act as they wish and STILL meet the goals of the company overall?)16. Is there a negotiated transfer price solution so that there will be goal congruence and autonomy? (That is, is there a price that can be negotiated between the two divisions that will meet the individual goals of the divisions AND the goals of the company?)17. How might income taxes play a role in determining the transfer price of goods and services between divisions?