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Accounting Management - Transfer Pricing Exercise

The document discusses a scenario at GreenWorld, Inc., a nursery products firm with three divisions. The Southern Division recently acquired a plastics factory that manufactures pots. The Western Division manager, Rosario Sanchez-Ruiz, approaches the Southern Division manager, Lorne Matthews, to see if he can get a better internal transfer price than the $75 per box she had been paying external vendors. Lorne provides the cost information for producing a box of pots, which is $63. He must determine how to respond to Rosario's request for a lower price of $70 per box.

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Queenielyn Tagra
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641 views

Accounting Management - Transfer Pricing Exercise

The document discusses a scenario at GreenWorld, Inc., a nursery products firm with three divisions. The Southern Division recently acquired a plastics factory that manufactures pots. The Western Division manager, Rosario Sanchez-Ruiz, approaches the Southern Division manager, Lorne Matthews, to see if he can get a better internal transfer price than the $75 per box she had been paying external vendors. Lorne provides the cost information for producing a box of pots, which is $63. He must determine how to respond to Rosario's request for a lower price of $70 per box.

Uploaded by

Queenielyn Tagra
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Accounting

Management

Transfer Pricing

Exercise 10-27
Members of group
Wahyu Agustira Putra (1310531011)
Muhammad Alghifari (1310531062)
Yesse Lina Pisi (1310531065)
Chelsa Ismael (1310532009)
Letifa Eka Wahyuni (1310532017)
Maritsa Febra Gemaya (1310532051)
10-27
GreenWorld, Inc., is a nursery products firm. It has three divisions that grow
and sell plants: the Western Division, the Southern Division, and the Canadian
Division. Recently, the Southern Division of GreenWorld acquired a plastics
factory that manufactures green plastic pots. These pots can be sold both
externally and internally. Company policy permits each manager to decide
whether to buy or sell internally. Each divisional manager is evaluated on the
basis of return on investment and EVA.
The Western Division had bought its plastic pots in lots of 100 from a
variety of vendors. The average price paid was $75 per box of 100 pots.
However, the acquisition made Rosario Sanchez-Ruiz, manager of the Western
Division, wonder whether a more favorable price could be arranged. She
decided to approach Lorne Matthews, manager of the Southern Division, to see
if he wanted to offer a better price for aninternal transfer. She suggested a
transfer of 3,500 boxes at $70 per box.

Lorne gathered the following information regarding the cost of a box of 100
pots:
Direct materials $35
Direct labor 8
Variable overhead 10
Fixed overhead* 10
Total unit cost $63
Selling price $75
Required
1. Suppose that the plastics factory is producing at
capacity and can sell all that it produces to outside
customers. How should Lorne respond to Rosarios
request for a lower transfer price?

2. Now assume that the plastics factory is currently selling


16,000 boxes. What are the minimum and maximum
transfer prices? Should Lorne consider the transfer at
$70 per box?

3. Suppose that GreenWorlds policy is that all transfer


prices be set at full cost plus 20 percent. Would the
transfer take place? Why or why not?
1(Question)

Suppose that the plastics factory is producing at


capacity and can sell all that it produces to outside
customers. How should Lorne respond to Rosarios
request for a lower transfer price?

Answer

If Lorne can sell all the product to the outside


customers (market), he shouldn't accept the
Rosario's request to reduce the price. Because if
Lorne can ell all the product at price $75, he will get
the optimum profit. But, if he accept the Rosario's
request, he only can sell the product at price $70.
2(Question)

Now assume that the plastics factory is currently


selling 16,000 boxes. What are the minimum and
maximum transfer prices? Should Lorne consider
the transfer at $70 per box?
Answer

As we know that to produce 1 unit plastic pot, the firm need variable cost:
Direct materials $35
Direct labor 8
Variable overhead 10
Total Variable Cost 53
So, the minimum price is $53

The maximum price as much market price is $75.


But, the ideal price for both division is:70+(75-70)/2=72,5

Ofcourse, Lorne should consider to accept the Rosario's request because


the income will increase by: [3.500(70-53)]=59.500
3(Question)

Suppose that GreenWorlds policy is that all transfer


prices be set at full cost plus 20 percent. Would the
transfer take place? Why or why not?

Answer

If the price be set at full cost plus 20%, the cost would be:
= Full Cost +Mark up
= 63 + (20% X 63)
= $75,6

No, transfer price will not occur. Because the price higher
than the market price. So, Rosario better buy the product
to the market.
Thank you

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