Transfer pricing
a) The transfer pricing system operated by a divisional company has the potential to make a significant contribution towards the achievement of corporate financial objectives.
Required
Explain the potential benefits of operating a transfer pricing system within a divisionalised company.
b) A company operates two divisions, Able and Baker. Able manufactures two products, X and Y. Product X is sold to external customers for $42 per unit. The only outlet for product Y is Baker.
Baker supplies an external market and can obtain its semi-finished supplies (product Y) from either Able or an external source. Baker currently has the opportunity to purchase product Y from an external supplier for $38 per unit. The capacity of division Able is measured in units of output, irrespective of whether product X, Y or combination of both are being manufactured. The associated product costs are as follows.
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X
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Y
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Variable costs per unit
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32
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35
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Fixed overheads per unit
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5
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5
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Total unit costs
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37
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40
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Required
Using the above information, provide advice on the determination of an appropriate transfer price for the sale of product Y from division Able to division Baker under the following conditions.
i) When division Able has spare capacity and limited external demand for product X
ii) When division Able is operating at full capacity with unsatisfied external demand for product X
c) The design of an information system to support transfer pricing decision making necessitates the inclusion of specific data.Identify the data that needs to be collected and how you would expect it to be used.