Q1) This problem is exercise in transfer pricing. It is suitable to Airtex, Kyocera, North Country Auto and Sarnia.
Go to Birch Paper case.
Based on section on Transfer Pricing in reading Introduction to Responsibility Accounting Systems, there are three primary methods for transfer pricing. They are (i) cost, (ii) market price, (iii) negotiated. First, fill in following table:
Market Price of Divisional Product
Excess Capacity (Yes or No)
All costs and market price entries in table above refer to costs and market prices of that division only, and do not include any transfer prices.
1. Determine minimum transfer price which Southern Division muts get for its product, suppose that it is operating at capacity?
2. Compute minimum transfer price that Southern Division must get for its product, suppose that it has significant excess capacity?
3. Suppose that Birch Paper adopts new transfer pricing policy, transferring at variable cost for Southern Division whenever it has excess capacity. Suppose that policy remains same for Thompson, transferring at market price. Compute profit will Thompson make if it "sells" (transfers) product to Northern at $430?
4. describe two significant potential problems with transfer pricing policy described in requirement 4.