1- For the manager of the CD to achieve the goal of maximizing the operating income of

the compressor department, what would be the minimum transfer price the manager
would be willing to charge to the AD?
2- For the manager of the AD to achieve the goal of maximizing the operating income of
the AD, what would be the maximum transfer price the manager would be willing to pay
for each compressor the AD manager buys from the CD?
3- Assume that the newly appointed management accountant wants to mediate a
discussion between the two managers to reach a transfer price that is better for the
company as a whole and that promotes goal congruence. What is the price range that
the management accountant should consider when leading the negotiations between the
two managers?
4- The CD currently produces 40,000 compressors a year and has contracts to sell a total
of 32,000 compressors a year to other companies in the market. Knowing that the AD
produces 45,000 refrigerators a year, what will be the optimal quantity of compressors to
be transferred internally to the AD assuming that the newly hired management
accountant is able to make the best decision for Cool & Cooler Co.?
5- If the CEO decided that transfer prices should be set at standard, full manufacturing
costs plus 5 percent markup, briefly explain the probable reaction of the manager of
each department?
1-

Explanation

To maximize the operating profit of the CD, its manager would ask for a minimum price that is
equal to the net selling price to external parties; $135 per compressor (selling price per
compressor of $145 minus variable shipping and distribution costs of $10).

This can be solved in another way, as follows:

The minimum selling price per compressor = Variable cost per unit + Opportunity cost,
where opportunity cost is equal to the contribution margin lost by not selling to external
parties:

Contribution margin = Selling price – All variable costs = $145 – $106 – $10 = $29 per
compressor

The minimum selling price per compressor = Variable cost per unit + Opportunity cost

The minimum selling price per compressor = $106 + $29 = $135 per compressor
2-

Explanation

The maximum transfer price that the AD is willing to offer to the CD is equal to the total cost it
usually pays to purchase a compressor on the market. This is equal to the purchase price plus the
transportation cost per unit.

Maximum price = $145 (purchase price) + $12 (transportation-in cost) = $157 per
compressor.
3-

Explanation

A negotiated price should be higher than or equal to the minimum price the selling department's
manager is willing to accept and less than or equal to the maximum price the buying
department's manager is willing to offer. Therefore, the transfer price range is set as follows:

$135 ≤ Transfer price ≤ $157

4-

Explanation

The optimal decision for Cool & Cooler Co. is to transfer all compressors produced by the CD to
the AD. This will save the company all shipping costs currently paid by the CD and all
transportation-in cost paid by the AD. The total savings will be $10 + $12 = $22 per unit for the
first 40,000 units produced internally.
5-

Explanation

When the transfer price is set at standard, full manufacturing costs plus 5 percent markup on
cost, the selling department's manager will better control manufacturing costs. In this way, the
CD's manager will maximize the department's operating income. The AD's manager will be
satisfied only if this management-imposed solution results in a transfer price that is less that the
current cost of purchasing from an outside supplier.