Transfer Pricing and Fair Market Value
Page 1
Transfer Pricing
Trident University
ACC501- Accounting for Decision Making
Professor – Dr. Tara Murphy
Date – 4/20/2013 Page 2 Trident University
ACC501- Accounting for Decision Making
Professor – Dr. Tara Murphy
Date – 4/20/2013 Transfer Pricing
1. Calculate the increase or decrease in profits for the three divisions and the company as a whole (four separate computations) if the agreement is enforced. Explain your thought process, comment on the situation, and make a suggestion based on the computations you have made.
Given that we have the operating costs of Division C, we can calculate their loss from reduced output. In the case of Division A and Division B, the reduction in cost related to lower outside cost would be considered profit change.
The proposal increases profit, but leaves Division C under-utilized. The fixed cost of under utilization would have to be considered before I would suggest the Company go to the new proposal.
My suggestion is to go ahead with the new proposal and increase Division C output and sell to outside customers.
2. Evaluate and discuss the implications of the following transfer pricing policies.
Transfer pricing policies should include a fixed cost portion of the internal supplier to identify the true cost. Profit taken by the internal supplier is overall company profit. By using a standard costing process, the internal supplier would be expected to keep efficiency at standard. In this case. Division C had profit from part 101 at $300 per unit and part 201 at $800 per unit. If the fixed cost of Division C were included in the transfer price, it would not be necessary to identify a profit per part.
a. Transfer price = cost plus a mark-up for the selling division
This policy provides contribution to the cost of the selling division. The mark up must be appropriate to nulify the cost of the selling department, but not to make the selling department
Transfer Pricing
Trident University
ACC501- Accounting for Decision Making
Professor – Dr. Tara Murphy
Date – 4/20/2013 Page 2 Trident University
ACC501- Accounting for Decision Making
Professor – Dr. Tara Murphy
Date – 4/20/2013 Transfer Pricing
1. Calculate the increase or decrease in profits for the three divisions and the company as a whole (four separate computations) if the agreement is enforced. Explain your thought process, comment on the situation, and make a suggestion based on the computations you have made.
Given that we have the operating costs of Division C, we can calculate their loss from reduced output. In the case of Division A and Division B, the reduction in cost related to lower outside cost would be considered profit change.
The proposal increases profit, but leaves Division C under-utilized. The fixed cost of under utilization would have to be considered before I would suggest the Company go to the new proposal.
My suggestion is to go ahead with the new proposal and increase Division C output and sell to outside customers.
2. Evaluate and discuss the implications of the following transfer pricing policies.
Transfer pricing policies should include a fixed cost portion of the internal supplier to identify the true cost. Profit taken by the internal supplier is overall company profit. By using a standard costing process, the internal supplier would be expected to keep efficiency at standard. In this case. Division C had profit from part 101 at $300 per unit and part 201 at $800 per unit. If the fixed cost of Division C were included in the transfer price, it would not be necessary to identify a profit per part.
a. Transfer price = cost plus a mark-up for the selling division
This policy provides contribution to the cost of the selling division. The mark up must be appropriate to nulify the cost of the selling department, but not to make the selling department