Case Study on
“Transfer Pricing Problems”
Division A of Lambda Company manufactures product X, which is sold to Division B as a component of product Y. Product Y is sold to Division C, which uses it as a component of Product Z. Product Z is also sold to customers outside of the Company. The intracompany pricing rule is that product are transferred between divisions as standard cost plus 10 percent return on inventories and fixed assets.
Question a: with transfer price calculated in Problem ...view middle of the document...
00, it can get more profit than follow the possible competitive price.
Question b: With the transfer prices calculated in Problem 2, is Division C better advised to maintain its present price at $28.00 or to follow competition in each of the instances above?
Because the answer to the Problem 2 is the same as the answer to the Problem 1, so the answer to this question is the same as the question 3 (a).
Maintaining the price at $28.00, the company can get more profit.
Question c: Which decisions are to the best economic interests of the company, other things being equal?
From the question 3 (a) and 3 (b), no matter which method the company use to calculate the cost, when the company maintains the price at $28.00, the company can maximum the profit.
Question d: Using the transfer prices calculated in Problem 1, is the manager of Division C making a decision contrary loss to the company in each of the competitive pricing actions described above?
No. The goal to the company is maximum its profit, and as our calculated, when the company maintains its price at $28.00, it can get the most profit, so the manager has acted in the best interest of the company.
If the company follows the competitive price, the opportunity losses are shown as followed:
1. The possible competitive price is $27.00, opportunity loss=39,600-34,000=5,600
2. The possible competitive price is $26.00, opportunity loss=30,800-24,000=6,800
3. The possible competitive price is $25.00, opportunity loss=22,000-14,000=8,000
4. The possible competitive price is $23.00, opportunity loss=8,800-(-6,000)=14,800
5. The possible competitive price is $22.00, opportunity loss=0-(-16,000)=16,000
Case Study on
“BIRCH PAPER COMPANY”
Birch Paper Company is a medium sized, partly integrated paper company which contained four production divisions, including Thompson division, and a timberland division. Each division is encouraged to base its transfer price on the current market price and is judged independently on the basis of its profit and return on investments. After reviewing the Birch paper company case we feel that from the company perspective is to accept the Thompson bid. The Thompson bid is in the best interest of the company in terms of cash flows and long-term profit.
Question 1: Which bid should Northern Division accept that is in the best Interests of Birch Paper Company?
Thompson should be accepted;
Even though the bid from West Paper seems at first to be the best choice.
If you calculate out the cost we find that Thompson actually has the lowest
costs associated with them
Costs for Thompson:
Linear board and corrugating medium: Cost $400x70%*60%= $168 plus Out