Rapid Industries has multiple divisions. One division, Iron Products, makes a component that another division, Austin, is currently purchasing on the open market. Iron Products currently has a capacity to produce 505,000 components at a variable cost of $6.00 and a full cost of $10.00. Iron Products has outside sales of 468,000 components at a price of $13.00 per unit. Austin currently purchases 45,000 units from an outside supplier at a price of $11.00 per unit. Assume that Austin desires to use a single supplier for its component.
a. What will be the effect on Rapid Industries' operating profit if the transfer is made internally? Assume the 45,000 units Austin needs are either purchased 100% internally or 100% externally.
b. What is the minimum transfer price? (Round your answer to 2 decimal places.)
c. What is the maximum transfer price? (Round your answer to 2 decimal places.)
Market-Based Transfer Pricing:
Transfer pricing refers to the price used fro sales/purchase transaction between related parties. When the selling division is operating at or close to capacity and sells its products to outside customers, a market-based transfer price should be considered.
Answer and Explanation: 1
a. The effect will be:
|37,000 units |
|8,000 units currectly|
|Sales Revenue @ $11 per unit||$407,000||$88,000||$495,...|
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fromChapter 10 / Lesson 8
Learn about market-based transfer pricing and understand how it works. Study a market-based transfer pricing example and compare to adjusted transfer pricing.