Guthierrez company makes various electronic products. The company is divided into a number of...
Question:
Guthierrez company makes various electronic products. The company is divided into a number of autonomous divisions that can either sell to internal units or sell externally. All division are located in buildings on the same piece of property. The Board Divison has offered the Chip Division $21 per unit to supply it with chips for 40,000 boards. It has been purchasing these chips for $22 per from outside suppliers. The Chip Division receives $22.50 per units for sales made to outside customers on this type of chip. The variable cost of chips sold externally by the Chip Divison is $14.50. It estimates that it will save $4.50 per chip of selling expenses on units sold internally to the Board Divisions. The Chip Division has no excess capacity.
a) Calculate the minimum transfer price that the chip division should accept. Discuss whether it is in the chip divisions best interest to accept the offer.
b) Suppose that the chip division decides to reject the offer. What are the financial implications for each division and for the company as a whole of this division?
Transfer Pricing:
Transfer pricing refers to the pricing mechanisms and strategies used by corporations to establish the price at which sales and purchased between its independent divisions will take place.
Answer and Explanation: 1
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a) The minimum transfer price that the chip division should accept is the new selling price in the open market because it is operating at full...
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Negotiated Transfer Pricing: Definition & Examples
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Chapter 10 / Lesson 6
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Negotiated transfer pricing is where company representatives negotiate prices themselves, not basing purely on market prices. Learn several advantages and disadvantages to using negotiated transfer pricing demonstrated through two companies' negotiations.
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