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    nrichards's Avatar
    nrichards Posts: 1, Reputation: 1
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    #1

    Jun 18, 2009, 02:22 PM
    Incremental costs and opportunity costs in transfer pricing
    Division A currently sells its product to outside parties at a price of $20 per unit. It incurs variable costs of $7 per unit and fixed costs of $50,000 per month. Monthly production is typically 10,000 units, and the division purchases no materials internally.

    Division B can use the product that Division A produces as a raw material in its operations. If Division B purchases the units from Division A, Division B would need to pay $1.50 per unit in shipping costs to an outside freight company. Alternatively, Division B can buy the units from a separate outside vendor at a delivered price of $21 per unit. Either way, Division B plans on meeting the demand of all its customers. The two divisions are trying to work out a mutually agreeable transfer price, and have agreed that incremental costs do not include fixed costs.

    A. Assume division A has ample idle capacity.

    1) Determine the INCREMENTAL cost PER UNIT of the organization as a WHOLE if Division B purchases the units INTERNALLY. Focus only on what happens if Division B purchases INTERNALLY.

    2) Determine the OPPORTUNITY cost PER UNIT of Division A if Division B purchases the units INTERNALLY. Focus only on what happens if Division B purchases INTERNALLY.


    3) Determine the INCREMENTAL cost PER UNIT of the organization as a WHOLE if Division B purchases the units EXTERNALLY. Focus only on what happens if Division B purchases EXTERNALLY.


    4) Determine the OPPORTUNITY cost PER UNIT of Division A if Division B purchases the units EXTERNALLY. Focus only on what happens if Division B purchases EXTERNALLY.



    B. Assume division A is ALREADY at full capacity before considering the interdivisional transfers.

    1) Determine the INCREMENTAL cost PER UNIT of the organization as a WHOLE if Division B purchases the units INTERNALLY. Focus only on what happens if Division B purchases INTERNALLY.


    2) Determine the OPPORTUNITY cost PER UNIT of Division A if Division B purchases the units INTERNALLY. Focus only on what happens if Division B purchases INTERNALLY.

    3) Determine the INCREMENTAL cost PER UNIT of the organization as a WHOLE if Division B purchases the units EXTERNALLY. Focus only on what happens if Division B purchases EXTERNALLY.
    Incremental Cost = 0

    4) Determine the OPPORTUNITY cost PER UNIT of Division A if Division B purchases the units EXTERNALLY. Focus only on what happens if Division B purchases EXTERNALLY.
    dalert's Avatar
    dalert Posts: 1, Reputation: 1
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    #2

    Dec 14, 2009, 08:45 PM

    Gfgy

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