Transfer pricing The materials used by the Laramie Division of Barron Company ar

Question

Transfer pricing

The materials used by the Laramie Division of Barron Company are currently purchased
from outside suppliers at $40 per unit. These same materials are produced by
Barron’s Astoria Division. The Astoria Division can produce the materials needed by
the Laramie Division at a variable cost of $28 per unit. The division is currently producing
80,000 units and has capacity of 100,000 units. The two divisions have recently
negotiated a transfer price of $35 per unit for 20,000 units. By how much will each division’s
income increase as a result of this transfer?
PE 24-6A
Transfer pricing


BARRON COMPANY
Change in Divisional Income
Laramie Division Astoria Division

Increase (decrease) in sales
Less increase (decrease) in variable costs
Increase (decrease) in income $100,000 $140,000

Explanation / Answer

Well, the sales for the Laramie division won't change but their variable costs will go down by (40-35) *20,000= 100,000. The sales for the Astoria division will go up by 20,000* 35= 700,000 Their variable costs will go up by 20,000*28= 560,000.

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