1. At its Video Division, Crew Enterprises manufactures computer monitors. These can be sold internally to the EDD Division of Crew or externally to independent customers. Sales and costs of the most popular monitor are as follows:
Per unit selling price $134.00
Per unit variable cost $103.00
Per unit fixed costs* $28.00
Full production capacity 11,000 units per month
Current level of production 8,500 units per month
“*” means based on full production capacity
The video division of crew plans to sell a maximum of 96,000 of these monitors to outside customers in the coming year. The EDD division of crew plans to buy 20,000 identical monitors from an outside supplier at a price of $134.00 the manager of the video division has offered to supply these 20,000 monitors to the EDD division at a price of $130.00
A. what is the minimum transfer price for the monitor that the video division should be will to accept on an internal transfer? What is the maximum price the EDD division should be will to pay for these monitors on an internal transfer?
B. Suppose the mangers of the EDD division learn of the idle capacity at the video division and make an offer of $122 for these monitors. Would you expect the video division to accept? What would be the effect on net income for the video division of accepting this offer?
C. What would be the effect on net income for crew as a
whole if the transfer price of $122 were accepted?
Transfer pricing in a service environment
Waldo and company llp, is an partnership that provides public accounting service. Waldo has three offices located in New Orleans, Baton Rouge, and Lafayette. Each of the offices employs approximately 30 professional accountants who are hired by and work solely for the office to which they are assigned. The offices are run independently, and there is a managing partner in charge of each office. Bonuses are paid to each managing partner based on criteria that include the number of staff hours worked and total billings for the respective office.
The Lafayette office was recently hired by a large petroleum company to conduct and audit. This engagement will require more account personnel that is currently available in the Lafayette office. Nancy Bloom, managing partner of the Lafayette office, has asked the other offices to “lend” her some professional staff to assist on this engagement. The other offices want to help but are concerned that “lending” their personnel will reduce the number of staff hours worked in their own offices, thereby reducing their billings and resulting in bonuses.
Why does this situation reflect a transfer pricing problem for the firm? How should the firm handle the interoffice transfer of personnel from a pricing standpoint? If there are professional staffs available in the New Orleans and Baton Rouge office who are not servicing clients, would the interoffice transfer price be affected?