Transfer Pricing Fillmore Industries is a vertically integrated firm with severa
ID: 2547879 • Letter: T
Question
Transfer Pricing
Fillmore Industries is a vertically integrated firm with several divisions that operate as decentralized profit centers. Fillmore’s Systems Division manufactures scientific instruments and uses the products of two of Fillmore’s other divisions. The Board Division manufactures printed circuit boards (PCBs). One PCB model is made exclusively for the Systems Division using proprietary designs, while less complex models are sold in outside markets. The products of the Transistor Division are sold in a well-developed competitive market; however, one transistor model is also used by the Systems Division. The costs per unit of the products used by the Systems Division are as follows:
The Board Division sells its commercial product at full cost plus a 30 percent markup and believes the proprietary board made for the Systems Division would sell for $12 per unit on the open market. The market price of the transistor used by the Systems Division is $3.70 per unit.
Required:
1. What is the minimum transfer price for the Transistor Division? Round your answer to the nearest cent.
$ per unit
What is the maximum transfer price of the transistor for the Systems Division? Round your answer to the nearest cent.
$ per unit
Explanation / Answer
The minimum transfer price for the Transistor Division is the variable costs of manufacturing the Transistor. Fixed manufacturing costs is sunk hence not considered. Thus the minimum transfer price is (0.4 + 0.8 + 0.7 ) = $1.9
The maximum transfer price of the transistor for the Systems Division is the selling price it is charging from the market. The maximum price is $3.7
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