Transfer Pricing

Chapter 10 Managerial Accounting Concepts and Empirical Evidence

Engine United, Inc. Negotiated Transfer Price Illustration

Selling Subunit
Sales Variable Costs Contribution Margin Fixed Costs PROFIT $50,000 31,000 19,000 $10,000 $9,000
`

Engine United, Inc. Negotiated Transfer Price Illustration

Buying Subunit Selling Subunit
Sales Variable Costs Contribution Margin Fixed Costs PROFIT $50,000 31,000 19,000 $10,000 $9,000
`

(Internal Purchase)
$650,000

Engine United, Inc. Negotiated Transfer Price Illustration

Buying
$ 50,000 = (10,000* $5)

Transferred Price Selling (Internal

Subunit Purchase)
$650,000 400,000
`

Subunit

50,000 + (10,000* $35) = 400,000

Sales Variable Costs Contribution Margin Fixed Costs PROFIT

$50,000 31,000 19,000 $10,000 $9,000

Engine United, Inc. Negotiated Transfer Price Illustration

Buying Subunit Selling Subunit
Sales Variable Costs Contribution Margin Fixed Costs PROFIT $50,000 31,000 19,000 $10,000 $9,000

(Internal Purchase)
$650,000 400,000 250,000
`

Engine United, Inc. Negotiated Transfer Price Illustration

Buying Subunit Selling Subunit
Sales Variable Costs Contribution Margin Fixed Costs PROFIT $50,000 31,000 19,000 $10,000 $9,000

(Internal Purchase)
$650,000 400,000 250,000 $100,000 $150,000
`

Engine United, Inc. Negotiated Transfer Price Illustration

Buying Subunit Selling Subunit
Sales Variable Costs Contribution Margin Fixed Costs PROFIT $50,000 31,000 19,000 $10,000 $9,000

Buying Subunit (External Purchase)

(Internal Purchase)
$650,000 400,000 250,000 $100,000 $150,000
`

Engine United, Inc. Negotiated Transfer Price Illustration

350,000 Subunit Variable Cost + (10,000 * 4) Cost of external Buying Buying purchase Subunit Subunit

Selling Subunit
Sales Variable Costs Contribution Margin Fixed Costs PROFIT $50,000 31,000 19,000 $10,000 $9,000

(Internal Purchase)
$650,000 400,000 250,000 $100,000 $150,000

(External Purchase)
$650,000 390,000

$ 10,000

Engine United, Inc. Negotiated Transfer Price Illustration

Buying Subunit Selling Subunit
Sales Variable Costs Contribution Margin Fixed Costs PROFIT $50,000 31,000 19,000 $10,000 $9,000

Buying Subunit (External Purchase)

$650,000 390,000 260,000

(Internal Purchase)
$650,000 400,000 250,000 $100,000 $150,000

Engine United, Inc. Negotiated Transfer Price Illustration

Buying Subunit Selling Subunit
Sales Variable Costs Contribution Margin Fixed Costs PROFIT $50,000 31,000 19,000 $10,000 $9,000

Buying Subunit (External Purchase)

$650,000 390,000 260,000 $100,000 $160,000

(Internal Purchase)
$650,000 400,000 250,000 $100,000 $150,000

Dehy Company Cost Based Transfer Price Illustration

A. Price of Product Y = $ 8; 1,000 units
Selling Subunit Revenues Variable Costs Contribution Margin $3,000 2,000 1,000 Buying Subunit FirmWide $8,000

VC =$2* 1,000 units Rev = Sell P * units = $ 8* 1,000 = $ 8,000

Dehy Company Cost Based Transfer Price Illustration

A. Price of Product Y = $ 8; 1,000 units
Selling Subunit Revenues Variable Costs Contribution Margin $3,000 2,000 1,000 Buying Subunit $8,000 7,000 1,000 FirmWide $8,000

Buying subunits own VC

VC = $4 * 1,000 units TVC = $ 4,000 + $ 3,000 = $ 7,000

Dehy Company Cost Based Transfer Price Illustration

A. Price of Product Y = $ 8; 1,000 units
Selling Subunit Revenues Variable Costs Contribution Margin $3,000 2,000 1,000 Buying Subunit $8,000 7,000 1,000 FirmWide $8,000 6,000

Selling subunit VC ($2,000) + buying subunit VC ($4,000)

Dehy Company Cost Based Transfer Price Illustration

A. Price of Product Y = $ 8; 1,000 units
Selling Subunit Revenues Variable Costs Contribution Margin $3,000 2,000 1,000 Buying Subunit $8,000 7,000 1,000 FirmWide $8,000 6,000 2,000

Dehy Company Cost Based Transfer Price Illustration

A. Price of Product Y = $ 8; 1,000 units
Selling Subunit Revenues Variable Costs Contribution Margin $3,000 2,000 1,000 Buying Subunit $8,000 7,000 1,000 FirmWide $8,000 6,000 2,000

B. Price of Product Y = $ 7.40; 2,000 units

Selling Buying FirmWide 12,000 $2,800 Subunit Revenues Variable Costs Contribution Margin $6,000 4,000 $2,000 Subunit 14,000 $800 $14,800 $14,800

Note: all calculations are to be done using 2,000 units