Burt Inc. has a number of divisions, including the Indian Division, a producer o
ID: 2533989 • Letter: B
Question
Burt Inc. has a number of divisions, including the Indian Division, a producer of liquid pumps, and Maple Division, a manufacturer of boat engines.
Indian Division produces the h20-model pump that can be used by Maple Division in the production of motors that regulate the raising and lowering of the boat engine's stern drive unit. The market price of the h20-model is $720, and the full cost of the h20-model is $540.
Required:
1. If Burt has a transfer pricing policy that requires transfer at full cost, what will the transfer price be?
$
Do you suppose that Indian and Maple divisions will choose to transfer at that price?
2. If Burt has a transfer pricing policy that requires transfer at market price, what would the transfer price be?
$
Do you suppose that Indian and Maple divisions would choose to transfer at that price?
3. Now suppose that Burt allows negotiated transfer pricing and that Indian Division can avoid $120 of selling expense by selling to Maple Division.
Which division sets the minimum transfer price?
Indian Division
What is the minimum transfer price?
$
Which division sets the maximum transfer price?
Maple Division
What is the maximum transfer price?
$
Do you suppose that Indian and Maple divisions would choose to transfer somewhere in the bargaining range?
Yes
Explanation / Answer
1)Transfer price : $ 540
Maple division accept the transfer as price is lower than market price while Indian division refuses to transfer
2)Transfer price : $720
Both division accept the transfer as for maple division there will be no effect as same can be purchased from market at 720 and Indian division will be at profit
3)
A)Indian division will set the minimum transfer price as it will transfer the units
Minimum price= 540 -120 =$ 420
b)Maple division will set maximum price that will be used for purpose
Maximum price = market price above which maple division will not buy as same can be purchased from market = $ 720
c)Yes ,between 420-720 as under this range both division will be in profit .
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