PROBLEM 22.8A Transfer Pricing DecisionsLO22-1, LO22-6
Sparta and Associates produces trophies and has twodivisions—the green division and the white division. The greendivision produces the trophy base, which it can sell to outsidemarkets for $150. A trophy base has variable costs per unit of $65and fixed costs of $100,000, based on monthly production of 2,000bases. Each trophy base could be sold to outside customers by thegreen division, as bases are in high demand. The green division hasno idle capacity.
The white division uses the base in the production ofchampionship trophies. The market price of a championship trophy is$300. The white division can acquire trophy bases from outsidesuppliers for $160. The manager of the white division is interestedin purchasing 1,500 trophy bases from the green division, but shewants to negotiate for a lower transfer price of $135. The currenttransfer price for a trophy base is the full market price of $150.The fixed costs in producing championship trophies are $57,500, andthe variable cost of producing a championship trophy is $75,excluding the cost of the trophy base.
Instructions
- What is the operating profit before tax for eachdivision using the market transfer price of $150?
- What is the operating profit before tax for eachdivision using the transfer price of $135, as suggested by themanager of the white division?
- How is the company's net income affected under the twotransfer pricing scenarios?
- Would it be more beneficial to the company if the greendivision sold trophy bases externally and the white divisionpurchased trophy bases from an outside supplier? Show yourcalculations.
