Decision on transfer pricing
Materials used by the Instrument Division of XPort Industries are currently purchased from outside suppliers at a cost of $374 per unit. However, the same materials are available from the Components Division. The Components Division has unused capacity and can produce the materials needed by the Instrument Division at a variable cost of $310 per unit.
Assume that a transfer price of $355 has been established and that 25,400 units of materials are transferred, with no reduction in the Components Division’s current sales.
Decision on Transfer Pricing Assignment
a. How much would XPort Industries’ total income from operations increase?
b. How much would the Instrument Division’s income from operations increase?
c. How much would the Components Division’s income from operations increase?
d. Any transfer price will cause the total income of the company to increase , as long as the supplier division capacity is used toward making materials for products that are ultimately sold to the outside.
Decision on Transfer Pricing Assignment
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