Transfer pricing

Hi, Thanks for your question. Ok - so Division A can sell the part-finished units by selling externally at $20 each. Because Division A has limited capacity they will not sell their part to division B at anything less than $20. For Division B to sell the finished product they firstly need to do $10 per unit extra work on the part finished units received from A. Therefore if the market price for Division B's finished product was $35 per unit ....then the sensible transfer price range would be from between $20 (Div A's minimum) to $25 ($35-10 which is market price less cost of conversion). However, if the external market price for Division B is reduced to $28 per unit - then Division B would be looking to pay at most $18 (28 - 10). As you know Division A will not accept less than $20 so this is a conflict. If Division B can not source the product for cheaper elsewhere and can not reduce its $10 conversion costs - then it is best for the company as a whole for Division B to withdraw the product from its range and leave A to sell its part finished goods at $20. (see below from whole company perspective) A & B Company (Division A & B) Sales = $28 p.u Less costs for A =$15 p.u less costs for B = $10 p.u Profit per unit = $3 Whereas if Division A sells externally and Division B withdraws: A & B Company profit will be: Sales $20 per unit less cost for A = $15 Profit per unit is $5 Hope that explains ok :-) Cath

on behalf of original poster. thanks! I was stuck too

You're welcome :-)