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    Transfer Price Cost of Buying From Outside Supplier

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    Justine Roberts E. Matorres
    This document discusses transfer pricing between two divisions, Tuner and Assembly, within the same company. It determines: 1) The acceptable range of transfer prices is between ₱110-₱180 per tuner. 2) If the transfer price is set at ₱110, the Tuner division can still make a ₱50 profit per tuner while meeting the outside market price. 3) Setting the transfer price higher than ₱180 would unnecessarily reduce the company's overall profits.

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    Transfer Price Cost of Buying From Outside Supplier

    Uploaded by

    Justine Roberts E. Matorres
    73 views3 pages
    This document discusses transfer pricing between two divisions, Tuner and Assembly, within the same company. It determines: 1) The acceptable range of transfer prices is between ₱110-₱180 per tuner. 2) If the transfer price is set at ₱110, the Tuner division can still make a ₱50 profit per tuner while meeting the outside market price. 3) Setting the transfer price higher than ₱180 would unnecessarily reduce the company's overall profits.

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    This document discusses transfer pricing between two divisions, Tuner and Assembly, within the same company. It determines: 1) The acceptable range of transfer prices is between ₱110-₱180 per tuner. 2) If the transfer price is set at ₱110, the Tuner division can still make a ₱50 profit per tuner while meeting the outside market price. 3) Setting the transfer price higher than ₱180 would unnecessarily reduce the company's overall profits.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    73 views3 pages

    Transfer Price Cost of Buying From Outside Supplier

    Uploaded by

    Justine Roberts E. Matorres
    This document discusses transfer pricing between two divisions, Tuner and Assembly, within the same company. It determines: 1) The acceptable range of transfer prices is between ₱110-₱180 per tuner. 2) If the transfer price is set at ₱110, the Tuner division can still make a ₱50 profit per tuner while meeting the outside market price. 3) Setting the transfer price higher than ₱180 would unnecessarily reduce the company's overall profits.

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    Problem 11 (Transfer Pricing with an outside market)

    Required 1.

    Assembly’s maximum purchase price or maximum transfer price

    Transfer Price ≤ Cost of buying from outside supplier


    ≤ ₱200 - (₱200×10%)
    ≤ ₱200 - ₱20
    ≤ ₱180

    Tuner’s minimum selling price or minimum transfer price

    Transfer Price ≥ Variable Cost + Total Contribution Margin on Lost Sales


    Number of units transferred
    ≥ ₱110 + (₱200 - ₱110) × 30,000
    30,000
    ≥ ₱200

    The Tuner division, which has a P200 minimum selling price, will not take anything less.
    The Assembly division, with a maximum purchase price of P180 net of buying discount, will not
    pay more than P180 for a specific reason. The two divisions' requirements are incompatible.
    The Assembly's maximum price is lower than the Tuner's minimum price, hence the answer is
    no.

    Required 2.

    Lost revenue per tuner ₱ 200

    Outside supplier price 180

    Loss in contribution margin per tuner ₱ 20

    Number of tuners per year × 30,000

    Total loss in profit ₱ 600,000

    The cost of the outside supplier is only P180 after the purchasing discount. If the Tuner
    division achieves this pricing, the Tuner division's profits, as well as the company's overall
    profits, will fall by P600,000 per year. The Assembly division's profits will also be unchanged
    because it will pay externally or regardless of whom they buy from.
    Required 3.

    Lowest Acceptable Transfer Price

    Transfer Price ≥ Variable Cost + Total Contribution Margin on Lost Sales


    Number of units transferred
    ≥ ₱110 + ₱ 0
    30,000
    ≥ ₱110

    Highest Acceptable Transfer Price


    Transfer Price ≤ Cost of buying from outside supplier
    ≤ ₱180

    Combining the two division, the acceptable range is:

    ₱110≤Transfer Price≤ ₱180

    Yes, the Tuner division has idle capacity, therefore the transfer from the Tuner division
    to the Assembly division will not affect Tuner's normal outside sales. The variable cost per tuner
    of P110 is the minimum price in this situation, as per the Assembly division. The Assembly
    division can buy tuners for P180 per from outside suppliers and would be willing to pay more.
    Assuming that the managers are aware of their own business and being cooperative, they
    should agree to a transfer with this range, and the transfer should occur.

    Required 4.

    Yes, because even if the Tuner division meets the outside market price of P200, they
    could still make a profit of P50 per tuner because the minimum transfer price as stated in
    "required 3" is only P110. Accepting the price would also allow them to achieve their goal of
    keeping profits within the corporate family. So, if the Tuner division does not meet the price from
    outside suppliers, a P50 per tuner opportunity will be lost.

    Required 5.

    No, the Assembly division should be free to purchase around for the best price possible.
    Even if this means a reduced profit for the company as a whole, the purchasing division should
    not be obliged to buy within if better pricing are available outside.
    Required 6.

    Tuner Division (seller) will have an increase in profit

    Selling Price ₱ 200

    Variable Cost ( 110)

    Contribution margin per tuner ₱ 90

    Number of tuners × 30,000

    Increase in profit ₱ 2,700,000

    Assembly Division (buyer) will have a decrease in profit

    Inside purchase Price ₱ 200

    Outside purchase price ( 160)

    Increased cost per tuner ₱ 40

    Number of tuners × 30,000

    Decrease in profit ₱ 1,200,000

    Company as a whole will have an increase in profit

    Increase in profit (Tuner) ₱ 2,700,000

    Decrease in profit (Assembly) ( 1,200,000)

    Increase in profit ₱ 1,500,000

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