Transfer Pricing from the Viewpoint of the Entire Company

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EXERCISE 11A–2 Transfer Pricing from the Viewpoint of the Entire Company LO11–5

Division A manufactures electronic circuit boards. The boards can be sold either to Division B of the same company or to outside customers. Last year, the following activity occurred in Division A:

Selling price per circuit board

$178

Variable cost per circuit board

$112

Number of circuit boards:

Produced during the year

20,400

Sold to outside customers

15,600

Sold to Division B

4,800

Sales to Division B were at the same price as sales to outside customers. The circuit boards purchased by Division B were used in an electronic instrument manufactured by that division (one board per instrument). Division B incurred $260 in additional variable cost per instrument and then sold the instruments for $600 each.

Required:

  1. Prepare income statements for Division A, Division B, and the company as a whole.
  2. Assume Division A’s manufacturing capacity is 20,400 circuit boards. Next year, Division B wants to purchase 4,800 circuit boards from Division A rather than 1,000. (Circuit boards of this type are not available from outside sources.) From the standpoint of the company as a whole, should Division A sell the 1,000 additional circuit boards to Division B or continue to sell them to outside customers? Explain.
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