Question

Determining Market-Based and Negotiated Transfer Prices

Carreker, Inc., has a number of divisions, including the Alamosa Division, producer of surgical blades, and the Tavaris Division, a manufacturer of medical instruments.

Alamosa Division produces a 2.6 cm steel blade that can be used by Tavaris Division in the production of scalpels. The market price of the blade is $22.00. Cost information for the blade is:

Variable product cost	$ 9.80
Fixed cost	6.20
Total product cost	$16.00

Tavaris needs 15,000 units of the 2.6 cm blade per year. Alamosa Division is at full capacity (90,000 units of the blade).

Required:

Round your answers to the nearest cent.

1. If Carreker, Inc., has a transfer pricing policy that requires transfer at full product cost, what would the transfer price be?
$ per unit

Do you suppose that Alamosa and Tavaris divisions would choose to transfer at that price?

Alamosa	No
Tavaris	Yes

2. If Carreker, Inc., has a transfer pricing policy that requires transfer at full cost plus 25 percent, what would the transfer price be?
$ per unit

Do you suppose that Alamosa and Tavaris divisions would choose to transfer at that price?

Alamosa	No
Tavaris	Yes

3. If Carreker, Inc., has a transfer pricing policy that requires transfer at variable product cost plus a fixed fee of $3.00 per unit, what would the transfer price be?
$ per unit

Do you suppose that Alamosa and Tavaris divisions would choose to transfer at that price?

Alamosa	No
Tavaris	Yes

4. What if Alamosa Division plans to produce and sell only 65,000 units of the 2.6 cm blade next year? The Carreker, Inc., policy is that all transfers be at full cost. Which division sets the minimum transfer price, and what is it?
Alamosa   $ per unit

Which division sets the maximum transfer price, and what is it?
Tavaris   $ per unit

Do you suppose that Alamosa and Tavaris divisions would choose to transfer?
Yes

Answer 1

1.Transfer Price = $16 per unit

Alamosa- No

Tavaris- Yes, since below market price

2.Transfer Price = 16+25% = $20 per unit

Alamosa- No

Tavaris- Yes, since below market price

3.Transfer Price = 9.80+3= $12.80 per unit

Alamosa- No

Tavaris- Yes, since below market price

4. The Transferring division i.e. Alamosa will set minimum price

Since there is spare capacity, minimum price is equal to variable cost per unit

i.e. $9.80 per unit

The receiving division i.e. Tavaris sets the maximum price

Equal to market price per unit

i.e. $22

Alamosa – Yes

Tavaris - Yes

Yes, since beneficial for both