Transfer Pricing from the Viewpoint of the Entire Company
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:
- Prepare income statements for Division A, Division B, and the company as a whole.
- 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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