Atascadero Industries operates a Manufacturing Division and

Atascadero Industries operates a Manufacturing Division and a Marketing Division. Both divisions are evaluated as profit centers. Marketing buys products from Manufacturing and packages them for sale. Manufacturing sells many components to third parties in addition to Marketing. Selected data from the two operations follow: 1,200,000 Capacity (units) Sales price Variable costs 520,000 $ 2.400 5,550 760 2.080 $12,000,000 $7,400.000 Fixed costs a For Manufacturing, this is the price to third parties. b For Marketing, this does not include the transfer price paid to Manufacturing Suppose Manufacturing is located in Country X with a tax rate of 70 percent and Marketing in Country Y with a tax rate of 30 percent. All other facts remain the same Required a. Current production levels in Manufacturing are 700,000 units. Marketing requests an additional 300,000 units to produce a special order. What transfer price would you recommend? per unit b. Suppose Manufacturing is operating at full capacity. What transfer price would you recommend? per unit c. Suppose Manufacturing is operating at 940,000 units. What transfer price would you recommend? per unit

Solution

a)

Optimal Transfer Price = $760

Manufacturing is not at capacity. It is 500,000 units below capacity. Transfer price should equal variable cost.

b)

Optimal Transfer Price = $2400

When at capacity, transfer price should equal the market price

c)

Manufacturing should charge variable cost for 260,000 of the units and market price for the remaining 40,000 units

Total based on variable cost = 260000 * $ 760 = $ 197600000

Total based on market price = 40000 * $2400 = $ 96000000

Total units produced = 300000

Optimal Transfer price = (197600000 + 96000000)/300000

= $978.67