Reference no: EM133065916

Question - Axlesfails is a large manufacturer with multiple divisions. All the divisions in Axlesfails are treated as investment centres. They are currently re-examining their transfer pricing system between their Parts Division and their Assembly Division. The incremental product cost incurred by the Parts Division is $80 per unit and they can sell their output externally for $120 per unit, less a sales commission charge of $5 per unit. The Assembly Division is purchasing the product from an external supplier at $120 per unit, plus a $3 transportation charge per unit.

Required - Assume that the Parts Division has limited capacity. Thus, for each unit it sells internally, it loses the opportunity to sell that unit externally. Determine the minimum transfer price for the internal transfers of units, that the Parts Division would charge the Assembly Division. From the standpoint of the Parts Division, why is the figure you calculated considered an acceptable transfer price?

What is the maximum transfer price that the Assembly Division would be willing to pay per unit on any internal transfers?

Assume now that the Parts Division has excess capacity. Use the general transfer pricing rule to determine the minimum transfer price that the Parts Division would be willing to accept from the Assembly Division for any internal transfers. Would this transfer price motivate the correct economic decision (internal versus external transfer) from the standpoint of the company as a whole? Explain.