Question

Sports Plus Inc. has a number of divisions, including the Nylon Plus Division, producer of nylon, and the Racket Division, a manufacturer of tennis rackets. Nylon Plus Division produces nylon string that can be used by Racket Division in the production of tennis rackets. The market price of the nylon is $5.30. Cost information for the nylon is:   Variable Product Cost $ 0.65

Fixed Cost   3.75     

Total Product Cost $ 4.40

Racket Division needs 10,000 units of nylon per year. Nylon Plus Division is at full capacity (100,000 units of nylon).

PART A

If Sports Plus Inc. has a transfer pricing policy that requires transfer at market price, what would the transfer price be? Do you suppose that Nylon Plus and Racket Divisions would choose to transfer at that price?

PART B

Now suppose that Sports Plus Inc. allows negotiated transfer pricing and that Nylon Plus Division can avoid $1.30 of selling and distribution expense by selling to Racket Division. Which division sets the minimum transfer price, and what is it? Which division sets the maximum transfer price, and what is it? Do you suppose that Nylon Plus Division and Racket Division would choose to transfer somewhere in the bargaining range?

Answer 1

A) IF SPORTS INC. HAS A TRANSFER PRICING POLICY THAT REQUIRES TRANSFER AT MARKET PRICE THAN TRANSFER PRICE WOULD BE MARKET PRICE I.E. 5.3.

B) NYLON DIVISION WILL SET THE MINIMUM TRANSFER PRICE AND THAT WOULD BE $4 (5.3-1.3) I.E MARKET PRICE MINUS SELLING & DISTRIBUTION EXPENSE. YES, RACKET DIVISION WILL BE READY TO PURCHASE FROM NYLON PLUS DIVISION AS IT IS GETTING NYLON STRING LESS THAN MARKET PRICE I.E AT $4. AND NYLON DIVISION WILL ALSO READY TO SELL NYLON STRINGS TO RACKET DIVISON BECAUSE ITS PROFIT DOES NOT GET EFFECTED..