Question

Exercise 15-31 International Transfer Prices (LO 15-4) Alascadero Industries operates a Manufacturing Division and a Markeling Division. Both divisions are evaluated as profit centers. Marketing buys products from Manufacturing and packages them for sale. Manufacturing sells many components to third parties in addition to Marketing. Selected data from the two operations follow Capacity (units) Sales price Variable costs Find costs Manufacturing 1,180,000 S 2,300 S 740 $11,800,000 Marketing 518,000 $ 5,450 $ 2,040 $7,380,000 * For Manufacturing, this is the price to third parties. For Marketing, this does not include the transfer price paid to Manufacturing Suppose Manufacturing is located in Country X with a tax rate of 65 percent and Marketing in Country Y with a tax rate of 35 percent. All other facts remain the same. Required: a. Current production levels in Manufacturing are 680,000 units. Marketing requests an additional 280,000 units to produce a special order. What transfer price would you recommend? Transfer price per unit b. Suppose Manufacturing is operating at full capacity. What transfer price would you recommend? Transfer price per unit o. Suppose Manufacturing is operating at 938,000 units. What transfer price would you recommend? Transfer price [ per unit ,

Answer 1

Ans:

Calculation of transfer price for manufacturing unit:

Sales price External : $2,300

Variable costs : $740

Capacity : 1,180,000 Units

1.

Where separate capacity is available transfer price should be equal to the variable costs. Also because manufacturing unit is located in 65% tax country. So transfer price should be minimum to save tax.

Recomended transfer price per unit : $740 per unit

2.

Where Manufacturing unit is operating at Full capacity and both Dicision are evaluted as seperate profit center. Transfer price for manufacturing division will be the current selling price to existing customers.

Recomended transfer price per unit : $2,300 per unit

*However for overall benefit company should transfer @minimum price to save higher tax on manufacturing unit.

3.

Operating Capacity : $938,000 Units.

So at Variable cost : 1,180,000 - 938,000 = 242,000 Units

And at current sales price : 280,000 - 242,000 = 38,000 Units

Total Transfer cost : 242,000 * $740 + 38,000 * $2,300 = $266,480,000

Transfer price per Unit : $266,480,000 / 280,000 = $951.71 or $952 per unit.

*However for overall benefit company should transfer @minimum price to save higher tax on manufacturing unit.

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