Question

(Appendix) Transfer Pricing. Creative Colors, Inc., a producer of paint, has two divisions—Paint division and Can division. Each division manager is evaluated based on profit produced by each division.

The Can division sells its cans to the Paint division for $2 per case to cover variable costs. The Can division also sells to outside customers for $3 per case.

Required:

Using the general economic transfer pricing rule, calculate the optimal transfer price assuming the Can division is below capacity.

Using the general economic transfer pricing rule, calculate the optimal transfer price assuming the Can division is at capacity.

Answer 1

Ans:

Transfer price means selling price of one unit which is transferred from one division to another division of the same organisation

in general if a division has spare capacity of production it should transfer at its variable cost to other division

if division has no spare capacity it utilises maximum capacity of production and haveing demand from out side customers in such a case

Transfer price=variable cost+contribution foregone

hear based on above transfer price from can division to paint division

situation one below capacity variable cost @2$ per unit

situation two at capacity selling price to outside customer @3$ per unit