Transfer Pricing
Transfer Pricing Question
1) BADM4280 Paper Ltd. is a division of GH Inc. BADM4280 Paper Ltd. produces paper and sells it to a number of companies, as well as to GH Inc. who uses it in their textbook division. Recently, the vice president of marketing for GH Inc. approached BADM4280 Paper Ltd. with a request to make 20,000 units of a special paper product. The following information is available regarding the BADM4280 Paper division:
Selling price of regular paper per unit $80 Variable cost of regular paper per unit 45 Additional variable cost of special paper per unit 25 The textbook division can purchase the special paper from an outside source for $75 per unit, plus shipping. The shipping equals $2 per unit. Required: A) Calculate the transfer price for each of the following situations:
1. BADM4280 Paper Ltd. has available capacity.
2. BADM4280 Paper Ltd. has no available capacity and would have to forgo sales of 20,000 units to existing customers to meet this request.
3. BADM4280 Paper Ltd. has no available capacity and would have to forgo sales of 30,000 units to existing customers to meet this request.
B) What other factors should be considered?
C) If GH Inc. insists that the transfer be made at a price it determines in all cases, how should BADM4280 Paper Ltd. be evaluated?
2) GH Inc. has two divisions. The paper division produces cardboard, which it can sell externally or internally to the box division. Both the paper and the box divisions are evaluated as profit centres. The firm has a policy of transferring all internal products at market price. The market price for the cardboard is $70 per unit, and the market price for the box is $100 per unit. Variable costs for the cardboard are $30 per unit. Per unit cost of manufacturing the boxes is $40 plus the cost of the cardboard. One unit of cardboard is needed to produce one unit of boxes.
Required: A) Will the box division purchase
1) BADM4280 Paper Ltd. is a division of GH Inc. BADM4280 Paper Ltd. produces paper and sells it to a number of companies, as well as to GH Inc. who uses it in their textbook division. Recently, the vice president of marketing for GH Inc. approached BADM4280 Paper Ltd. with a request to make 20,000 units of a special paper product. The following information is available regarding the BADM4280 Paper division:
Selling price of regular paper per unit $80 Variable cost of regular paper per unit 45 Additional variable cost of special paper per unit 25 The textbook division can purchase the special paper from an outside source for $75 per unit, plus shipping. The shipping equals $2 per unit. Required: A) Calculate the transfer price for each of the following situations:
1. BADM4280 Paper Ltd. has available capacity.
2. BADM4280 Paper Ltd. has no available capacity and would have to forgo sales of 20,000 units to existing customers to meet this request.
3. BADM4280 Paper Ltd. has no available capacity and would have to forgo sales of 30,000 units to existing customers to meet this request.
B) What other factors should be considered?
C) If GH Inc. insists that the transfer be made at a price it determines in all cases, how should BADM4280 Paper Ltd. be evaluated?
2) GH Inc. has two divisions. The paper division produces cardboard, which it can sell externally or internally to the box division. Both the paper and the box divisions are evaluated as profit centres. The firm has a policy of transferring all internal products at market price. The market price for the cardboard is $70 per unit, and the market price for the box is $100 per unit. Variable costs for the cardboard are $30 per unit. Per unit cost of manufacturing the boxes is $40 plus the cost of the cardboard. One unit of cardboard is needed to produce one unit of boxes.
Required: A) Will the box division purchase