Case Study

CASE STUDY

Chapter SIX

CASE 6-1

Case Study on

“Transfer Pricing Problems”

Case SUMMARY

Division A of Lambda Company manufactures product X, which is sold to Division B as a component of product Y. Product Y is sold to Division C, which uses it as a component of Product Z. Product Z is also sold to customers outside of the Company. The intracompany pricing rule is that product are transferred between divisions as standard cost plus 10 percent return on inventories and fixed assets.

Case Questions

Question a: with transfer price calculated in Problem 1, is Division C better advised to maintain its price at $28 or follow competition in each of the instances above?

Answer:

Under possible competitive price $27.00

If company maintain the price at $28, the profit=(28-23.6) ×9,000=39,600

If company follow the possible competitive price at $27, the profit= (27-23.6) ×10,000=34,000

Under possible competitive price $26.00

If company maintain the price at $28, the profit=(28-23.6) ×7,000=30,800

If company follow the possible competitive price at $26, the profit= (26-23.6) ×10,000=24,000

Under possible competitive price $25.00

If company maintain the price at $28, the profit=(28-23.6) ×5,000=22,000

If company follow the possible competitive price at $25, the profit= (25-23.6) ×10,000=14,000

Under possible competitive price $23.00

If company maintain the price at $28, the profit=(28-23.6) ×2,000=8,800

If company follow the possible competitive price at $23, the profit= (23-23.6) ×10,000=-6,000

Under possible competitive price $22.00

If company maintain the price at $28, the profit=(28-23.6) ×0=0

If company follow the possible competitive price at $22, the profit= (22-23.6) ×10,000=-16,000

So, no matter how much is the possible competitive price, when the company maintain its price at...