Spark Ltd has two divisions, assembly and electrical. The assembly division transfers partially completed components to the electrical division at a predetermined transfer price. The assembly division’s standard variable production cost per unit is $550. This division has spare capacity, and it could sell all its components to outside buyers at $680 per unit in a perfectly competitive market. Required: -What transfer price would you recommend if there was no outside market for the transferred component and the assembly division had spare capacity? - Explain how negotiation between the supplying and buying units may be used to set transfer prices. How does this relate to the general transfer pricing rule?
Spark Ltd has two divisions, assembly and electrical. The assembly division transfers partially completed components to the electrical division at a predetermined transfer price. The assembly division’s standard variable production cost per unit is $550. This division has spare capacity, and it could sell all its components to outside buyers at $680 per unit in a perfectly competitive market. Required: -What transfer price would you recommend if there was no outside market for the transferred component and the assembly division had spare capacity? - Explain how negotiation between the supplying and buying units may be used to set transfer prices. How does this relate to the general transfer pricing rule?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Week 8
Spark Ltd has two divisions, assembly and electrical. The assembly division transfers partially
completed components to the electrical division at a predetermined transfer price. The assembly
division’s standard variable production cost per unit is $550. This division has spare capacity, and it
could sell all its components to outside buyers at $680 per unit in a
Required:
-What transfer price would you recommend if there was no outside market for the transferred component and the assembly division had spare capacity?
- Explain how negotiation between the supplying and buying units may be used to set transfer
prices. How does this relate to the general transfer pricing rule?
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