Transfer Pricing (part c)

1. says

nice lecture. In lecture example it says” A has limited capacity of making 20000 units, External demand of 8000 units, B wants 15000 units”, the thing I dont get it is why bother 3000 units when the limited capcity has been reached ( First 12000 units + extra demand 8000), when A is not able to produce any more produce after 20,000 units, how could it produce 3000 extra anyway?

2. says

Dear Sir
Very nice lecture. But kindly clarify my doubt. Transfer pricing is serving the purpose of setting Transfer Price enough to the limit of enabling us to assess performance of divisions and create enough interest for divisions to achieve excellence for themselves in terms of divisional profits.
But in reality everything has to be done from practical relevance i.e how much organization as a whole is earning from outside rather than getting involved in nitty gritty of fact how much A should pay or B should Pay.
1) Maximum contribution Organization gets is 9 ( 30-21) rather than A’s contribution ( 19-15) 4
2) So sell maximum outside so 15000 X 9 = 135000
3) Then Let A sell 5000 X 4= to earn contribution of 20000
4) Thus total contribution organization as a whole earns 155,000 and that should be base to set Transfer pricing for internal divisions
5) So range would be 15 for 15000 units and 19 for 5000 units
Is it correct way of looking at problem.
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by applying same logic – How much company earns maximum
1) First find out that
2) then set TP for internal divisions
3) Here maximum contribution is 12 for A ( and also for company) by selling outside so sell all
8000 X 12 = to earn 96000
4) Then B’s contribution being 10 sell 12000 X 10= to earn 120,000
5) Thus company earns maximum possible 216,000
then set TP within range of
6) 12 for 12000 internal transfer
7) A can sell 8000 for 24 and earns 96000 contribution.
Is it right way of doing ! I .e finding out first what is best for company as a whole.
7) 10
kindly clarify

3. says

In transfer pricing does it mean that when there is external demand and limited capacity the charging of extra units you give priority to selling inside o

• says

@annajuly,
Hi it really depends. Say is the 1st example, transfer price to B would be \$19-24. In this case A would be willing to selling to B at \$19 as it make no difference whether to sell outside the 3000 units. However, in the 2nd example for the additional 3000, transfer to B would have to be \$24. This would not be possible for B to accept as they will only be willing to buy at \$22 max. Thus when the tutor mentioned if TP is at \$23, it give none of the managers to transacts.

In conclusion, it really depends on the TP price in making the decision (cause it will depends on the price A is selling outside). By following the tutor “format” it would easily help to guide you to the decision. Hope this explaination helps. All the best for the coming exam.

• says

@ferrischan, thanks but will i be okay, to say that it depends on the company policy though the best transfer price should be set to allow divisions maximize their profits