ACA 212 Strategic Cost Management

Lesson 6: Transfer Pricing

Exercise 6.1 Problems

1. Cruises, Inc., operates two divisions: (1) a management division that owns and manages
cruise ships in the Florida Keys and (2) a repair division that operates a dry dock in Marble
Sand Florida. The repair division works on company ships, as well as other large-hull ships.
The repair division has an estimated variable cost of $28.50 per labor-hour. The repair
division has a backlog of work for outside ships. They charge $48.00 per hour for labor,
which is standard for this type of work. The management division complained that it could
hire its own repair workers for $30.00 per hour, including leasing an adequate work area.

What is the minimum transfer price per hour that the repair division should obtain for its
services, assuming it is operating at capacity?

A. $28.50.
B. $30.00.
C. $39.00.
D. $46.50.
E. $48.00.

2. Cruises, Inc., operates two divisions: (1) a management division that owns and manages cruise
ships in the Florida Keys and (2) a repair division that operates a dry dock in Marble Sand Florida.
The repair division works on company ships, as well as other large-hull ships.
The repair division has an estimated variable cost of $28.50 per labor-hour. The repair division has
a backlog of work for outside ships. They charge $48.00 per hour for labor, which is standard for
this type of work. The management division complained that it could hire its own repair workers
for $30.00 per hour, including leasing an adequate work area.

What is the maximum transfer price per hour that the management division should pay?

A. $28.50.
B. $30.00.
C. $39.00.
D. $46.50.
E. $48.00.
 3. Cruises, Inc., operates two divisions: (1) a management division that owns and manages cruise
ships in the Florida Keys and (2) a repair division that operates a dry dock in Marble Sand
Florida. The repair division works on company ships, as well as other large-hull ships.
The repair division has an estimated variable cost of $28.50 per labor-hour. The repair division
has a backlog of work for outside ships. They charge $48.00 per hour for labor, which is
standard for this type of work. The management division complained that it could hire its own
repair workers for $30.00 per hour, including leasing an adequate work area.

If the repair division had idle capacity, what is the minimum transfer price that the repair
division should obtain?

A. $28.50.
B. $30.00.
C. $39.00.
D. $46.50.
E. $48.00.

4. Flowers and Flowers, Inc., has two divisions. Division A has an investment base of $750,000 and
produces (and sells) 100,000 units of Eyne at a market price of $10.00 per unit. Variable costs
total $3.50 per unit, and fixed charges are $4.00 per unit (based on a capacity of 120,000 units).
Division B wants to purchase 25,000 units of Eyne from Division A. However, Division B is only
willing to pay $6.75 per unit.

What is the contribution margin for Division A without the transfer to Division B?

A. $250,000.
B. $650,000.
C. $675,000.
D. $1,000,000.

5. Flowers and Flowers, Inc., has two divisions. Division A has an investment base of $750,000 and
produces (and sells) 100,000 units of Eyne at a market price of $10.00 per unit. Variable costs
total $3.50 per unit, and fixed charges are $4.00 per unit (based on a capacity of 120,000 units).
Division B wants to purchase 25,000 units of Eyne from Division A. However, Division B is only
willing to pay $6.75 per unit.

What is the contribution margin for Division A if it transfers 25,000 units to Division B at $6.75
per unit?

A. $250,000.
B. $650,000.
C. $675,000.
D. $698,750.
 6. Flowers and Flowers, Inc., has two divisions. Division A has an investment base of $750,000 and
produces (and sells) 100,000 units of Eyne at a market price of $10.00 per unit. Variable costs
total $3.50 per unit, and fixed charges are $4.00 per unit (based on a capacity of 120,000 units).
Division B wants to purchase 25,000 units of Eyne from Division A. However, Division B is only
willing to pay $6.75 per unit.

What is the minimum transfer price for the 25,000 unit order that Division A would accept if it
wishes to maintain its pre-order contribution?

A. $3.50.
B. $4.00.
C. $4.80.
D. $6.00.

7. A company is highly centralized. Division X, which is operating at capacity, produces a

component that it currently sells in a perfectly competitive market for $13 per unit. At the
current level of production, the fixed cost of producing this component is $4 per unit and the
variable cost is $7 per unit. Division Y would like to purchase this component from Division X.
The price that Division X should charge Division Y per unit for this component is:
A. $7.
B. $11.
C. $13.
D. $15.

8. A company has two divisions, A and B, each operated as a profit center. Division A charges
Division B $35 per unit (for each unit transferred to Division B). Other data for Division A
are as follows:

Division A is planning to raise its transfer price to $50 per unit. Division B can purchase units
at $40 per unit from outsiders, but doing so would idle Division A's facilities (now
committed to producing units for Division B), Division A cannot increase its sales to
outsiders. From the perspective of the company as a whole, from who should Division B
acquire the units, assuming Division B's market is unaffected?

A. Outside vendors.
B. Division A, but only at the variable cost per unit.
C. Division A, but only until fixed costs are covered, then should purchase from outside
vendors.
D. Division A, in spite of the increased transfer price.

.
 9. Cohasset Company currently manufactures all component parts used in the manufacture of
various hand tools. Hurley Division produces a steel handle used in three different tools. The
budget for these handles is 120,000 units with the following unit cost.

Ironwood Division purchases 20,000 handles from Hurley Division and completes the hand
tools. An outside supplier, R & M Steel, has offered to supply 20,000 units of the handle to
Ironwood Division for $1.25 per unit. Hurley currently has idle capacity that cannot be used.

What is the cost impact to Cohasset as a whole of purchasing from R & M Steel? (CMA
adapted)

A. increase the handle unit cost by $0.05.

B. increase the handle unit cost by $0.15.
C. decrease the handle unit cost by $0.15.
D. decrease the handle unit cost by $0.25.
E. decrease the handle unit cost by $0.05.

10. A large manufacturing company has several autonomous divisions that sell their products in
perfectly competitive external markets as well as internally to the other divisions of the
company. Top management expects each of its divisional managers to take actions that will
maximize the organization's goal as well as their own goals. Top management also promotes a
sustained level of management effort of all of its divisional managers. Under these
circumstances, for products exchanged between divisions, the transfer price that will generally
lead to optimal decisions for the manufacturing company would be a transfer price equal to
the:

A. full cost of the product.

B. full cost of the product plus a markup.
C. variable cost of the product plus a markup.
D. market price of the product.