Transfer Pricing Case Study Analysis (not sure if correct) Detailed explanation

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Transfer Pricing Case Study

Analysis (not sure if correct)

Detailed explanation needed

Chapter 19: Transfer Pricing Assisi Electronics Assisi Electronics manufactures motherboards for computers. The company is divided into two divisions: manufacturing and programming. The manufacturing division makes the board, and the programming division makes the adjustments required to meet the customer's specifications The average total cost per unit of the boards in the manufacturing division is about $450 and the average total cost per board incurred in the programming division is $100. The average selling price of the boards is is not a feasible alternative. $700. The company is now operating at capacity, and increasing the volume of production In the past, the managers of the two divisions have negotiated a transfer price. The average transfer price has been about $500, resulting in the manufacturing division recognizing a board. division. profit of about $100 per Each of the managers receives a bonus that is proportional to the profit reported by his/her Karen Barton, the manager of the manufacturing division, has announced that she is no longer willing to supply boards to Electronics, a com the boards that Karen's divi Karen indicated that she offered the boards to the programming division at $625 per board on th grounds that selling and distribution costs would be reduced by selling inside. Neil Wilson, the manager of the programming division, refused the offer on the grounds that the programming division would show a loss at the transfer price. the programming division. Sam Draper, the senior purchasing executive for Perugia puter manufacturer, has indicated that he is willing to purchase, at $650 per unit, all ision can supply and is willing to sign a long-term contract to that effect. Neil has appealed to Shannon McDonald, the general manager, arguing that Karen should from selling outside. Neil has indicated that a preliminary i purchase these boards for less than $640 outside. Therefore, allowing Karen to sell outside would effectively doom Neil's division be prohibited investigation suggests that he cannot 1. What transfer price would you recommend and why? 2. What recommendations do you have for the programming division? 3. What are some of the strategic issues that Assisi Electronics needs to consider?

Explanation / Answer

Dear Student lets sumamriased the question first There are 2 divisions in one manufacture company Division 1 : Manufacturing division Division2 : Programming division Cost per unit of manufacturing division = $450 Cost per unit of programming division = $100 Selling price of the final product = $700 Old transfer price = $ 500 Profit earning by Manufacturing division = 500-450 = $50 Profit earning by Programming division = 700-500-100 = $100 Purchasing price offered by perugia electronics = $650 Selling & distribution costs = $25 Transfer price offering by manufacturing division $625 But, With this Transfer price the programming division is getting loss as you proved in th given answer. 1 The maximum selling price effored by the programming division is 700-100 = $600 Minimum selling price variable cost of product to manufacturing division = $ 450 2 As you mentioned in your answer. It is proved that. Programming division cannot get product for not less than $640 from outside. and if it purhase from outside at $ 640 or $ 625 from manufaturing division. Sure it will incure loss. So, Programming division try get the product from outside makket below $600. If it able to get the product below $ 600 then it is better continue division. 3 So, Programming division try get the product from outside makket below $600. If it able to get the product below $ 600 then it is better continue division. In the answer given by you, If asssii electronics continue only manufacturing division, Company is getting high profit than the remaining options. It is recomemded to close the programming division, If it is difficult to get product from outside market less than $600

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