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	$ 10.00
Fixed cost	5.60
Total product cost	$15.60

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
Tavaris

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
Tavaris

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
Tavaris

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?
   $ per unit

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

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

Answer 1

1.Price will be total cost i.e. $15.60

2.Transfer price = 15.60 + 25% = $19.50

3.Alamosa – No, since price is less than market price and transfer will lead to decline in regular sales

Tavaris – Yes, since price is lower than market price

3.Transfer Price = Variable cost + $3

= 10+3

= $13 per unit

Alamosa – No

Tavaris – Yes

4.Amalosa sets minimum price

It will be variable cost per unit since spare capacity i.e. $13 per unit

Tavaris sets maximum price $22 i.e. market price

Yes, since gains for both