Question

Universal Techno Co. has its manufacturing affiliate in the United States. The manufacturing affiliate wishes to invoice its sales affiliate located in Belgium for an order of 10,000 electronic items at a profit margin of 20% of cost. The manufacturing cost based on operations at full capacity of 10,000 items is $162 per unit. Universal Techno Co. incurs operating expenses of $150,000 and Belgium incurs operating expenses of $125,000. The freight cost to transport the items to the sales affiliate in Belgium is $18 per unit. Belgium levies a tariff of 2.5% on the declared value of imported items. The corporate income tax in Belgium is 50% and in the United States, the corporate income tax is 25%.

Required:

Based on the above information, calculate the transfer price per unit set by the manufacturing affiliate in the United States.

Answer 1

Transfer price is the amount charged when one division of an organisation sell goods to another division of the organization.

Internal transfers create a need of pricing mechanism between division to accurately reflect cost and revenue of organization.

Transfer price = Variable cost incurred + opportunity costs

Variable costs = manufacturing costs ($162) + freight costs ($18) = $180

Opportunity cost = $162×20% = $ 32.4

Therefore Transfer price = $180 + $ 32.4 = $ 212.4