Transfer Price

Transfer Price

The Assembly Division of SLOWCAR Company has offered to purchase 90,000 batteries from the Electrical Division (ED) for $104 per unit. At a normal volume of 250,000 batteries per year, production costs per battery are:

Direct materials $40

Direct labor 20

Variable factory overhead 12

Fixed factory overhead 42

Total $114

The Electrical Division has been selling 250,000 batteries per year to outside buyers for $136 each. Capacity is 350,000 batteries/year. The Assembly Division has been buying batteries from outside suppliers for $130 each.

Should the Electrical Division manager accept the offer? Will an internal transfer be of any benefit to the company?

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ED manager should accept. There is surplus capacity. So the relevant costs to the ED is the VC = $72 / battery.

The increased CM to the ED would be 90,000*($104 – 72) = $2.88 M

The company would be better off with an internal transfer. Currently paying $130 for batteries that could be made internally for incremental cost of $72. The company would save 90,000 * (130 – 72) = $5.22 M per year!

The TP range = max. of $130 to low of $72

What if there is no excess capacity?? (max. = $130, but min.= $136)

Transfer price: example 2

Min. transfer price = incremental (outlay) costs/unit to point of transfer + opportunity cost/unit to the supply division.

The SF Manufacturing Co. has two divisions in Iowa, the Supply Division and the BUY Division. Currently, the BUY Division buys a part (3,000 units) from Supply for $12.00 per unit. Supply wants to increase the price to BUY to $15.00. The controller of BUY claims that she cannot afford to go that high, as it will decrease the division’s profit to near zero. BUY can purchase the part from an outside supplier for $14.00. The cost figures for Supply are:

Direct Materials $3.25

Direct Labor 4.75

Variable...