Decision on transfer pricing
Based on Retina Manufacturing’s data in Exercise 14-20, assume that a transfer price of $72 has been established and that 25,000 units of materials are transferred, with no reduction in the Electronic Division’s current sales.
a. How much would Retina Manufacturing’s total income from operations increase?
b. How much would the Aircraft Division’s income from operations increase?
c. How much would the Electronic Division’s income from operations increase?
d. If the negotiated price approach is used, what would be the range of acceptable transfer prices and why?
Exercise 14-20
Decision on transfer pricing
Wiring used by the Aircraft Division of Retina Manufacturing is currently purchased from outside suppliers at a cost of $75 per unit. However, the same materials are available from the Electronic Division. The Electronic Division has unused capacity and can produce the materials needed by the Aircraft Division at a variable cost of $66 per unit.
a. If a transfer price of $70 per unit is established and 25,000 units of materials are transferred, with no reduction in the Electronic Division’s current sales, how much would Retina Manufacturing’s total income from operations increase?
b. How much would the Aircraft Division’s income from operations increase?
c. How much would the Electronic Division’s income from operations increase?
