Wallen Products Inc. has just purchased a small company that specializes in the manufacture of...


Wallen Products Inc. has just purchased a small company that specializes in the manufacture of electronic tuners that are used as a component part of LCD TVs. Wallen Products is a decentralized company, and it will treat the newly acquired company as an autonomous division with full profit responsibility.

The new division, called the Tuner Division, has the following revenue and costs associated with each tuner that it manufactures and sells:

Selling price Expenses: Variable $20 $11

Fixed (based on a capacity of 100,000 tuners per year) 6 17

Operating income $ 3

Wallen Products also has an Assembly Division that assembles TVs. This division is currently purchasing 30,000 tuners per year from an overseas supplier at a cost of $20 per tuner, less a 10% purchase discount. The president of Wallen Products is anxious to have the Assembly Division begin purchasing its tuners from the newly acquired Tuner Division in order to keep the profits within the corporate family Reurate e Required For (1) and (2) below, assume that the Tuner Division can sell all of its output to outside TV manufacturers at the normal $20 price

1.a. What is the minimum transfer price for Tuner Division? Minimum transfer price

1-b. What is the maximum transfer price that Assembly Division is ready to pay? Maximum transfer price

1-c. Are the managers of the Tuner and Assembly Divisions likely to voluntarily agree to a transfer price for 30,000 tuners each year?

General Transfer Pricing Rule

The general transfer pricing rule is used to help promote goal congruence and it sets the transfer price as outlay costs plus opportunity costs. Outlay costs relate to variable costs of manufacturing a product while opportunity costs include benefits that the selling division has to forego if it chooses to transfer products to the buying decision. Opportunity costs will need to included if the selling division does not have sufficient capacity to deal with the order from the buying division and has to forego existing sales.

Answer and Explanation: 1

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General Transfer Pricing Rule = Outlay Cost + Opportunity Cost = 11 + (20 -11) = $20

Minimum transfer price for Tuner Division is $20



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Learn more about this topic:

Market-Based Transfer Pricing: Definition & Computation


Chapter 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.

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