Atascadero Industries operates a Manufacturing Division and a Marketing Division
ID: 2595354 • Letter: A
Question
Atascadero Industries operates a Manufacturing Division and a Marketing 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: Manufacturing Marketing Capacity (units) 1,170,000 517,000 Sales pricea $ 2,250 $ 5,400 Variable costsb $ 730 $ 2,020 Fixed costs $ 11,700,000 $ 7,370,000 a For Manufacturing, this is the price to third parties. b For Marketing, this does not include the transfer price paid to Manufacturing. Suppose Manufacturing is located in Country X with a tax rate of 70 percent and Marketing in Country Y with a tax rate of 30 percent. All other facts remain the same. Required: a. Current production levels in Manufacturing are 670,000 units. Marketing requests an additional 270,000 units to produce a special order. What transfer price would you recommend? b. Suppose Manufacturing is operating at full capacity. What transfer price would you recommend? c. Suppose Manufacturing is operating at 937,000 units. What transfer price would you recommend?
Explanation / Answer
Answer A - Transfer Price Recommendation
Production Capacity of Manufacturing Division-1170000 units
Current Production Level of Manufacturing Division=670000 units
Units Required By Marketing division for Special order = 270000 units
There is Excess Capacity in Manufacturing Division
(1170000 - 670000 - 270000) = 230000 units
Current Production Level is lesser than Production capacity hence Transfer Price should be Equal to its Variable Cost to atleast break Even.
Recommendatory Transfer Price = $730
Answer B
In case Manufacturing division is currently operating at Full capacity then Recommendatory transfer price should be Equal to market Price
Transfer Price = $2250
Answer C - If Manufacturing Department is working at 937000 units and Marketing division require 270000 units
Excess Capacity in Manufacturing Division
Requirement of additional units
Calculation of Transfer Price
$170090000
(233000 * $730)
$83250000
(37000 * $2250)
$938.30
($253340000/27000)
Current Production Level is lesser than Production capacity hence Transfer Price should be Equal to its Variable Cost to atleast break Even.
Recommendatory Transfer Price = $730
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