TRANSFER PRICING

Kringly Corporation

Kringly Corporation

Kringly Corporation

The increase or decrease in the profits for the three divisions that are Division A, B, C and the company are given below;

Division A

Division B

Current

Units from Division C

3000

1000

External Supplier

1000

1000

Transfer Price

$ 1,000

$ 2,000

Market Price (External Supplier)

$ 900

$ 1,900

Cost for buying from Division C

$ 3,000,000

$ 2,000,000

Cost for buying from External Supplier

$ 900,000

$ 1,900,000

Total Cost

$ 3,900,000

$ 3,900,000

Proposed

Units from Division C

2000

500

External Supplier

2000

1500

Transfer Price

$ 900

$ 1,900

Market Price

$ 900

1900

Cost for buying from Division C

$ 1,800,000

$ 950,000

Cost for buying from External Supplier

$ 1,800,000

$ 2,850,000

Total Cost

$ 3,600,000

$ 3,800,000

Increase in Profit

$ 300,000

$ 100,000

Division C

Part

101

201

Current

Direct materials

$ 200

$ 300

Direct labor

$ 200

$ 300

Variable overhead

$ 300

$ 600

Transfer price

$ 1,000

$ 2,000

Annual Volume (units)

3000

1000

Sales

3000000

2000000

Total Cost

$ 700

$ 1,200

Profit

$ 2,999,300

$ 1,998,800

Proposed

Transfer Price

$ 900

$ 1,900

Annual Volume (units)

2000

500

Sales

$ 1,800,000

$ 950,000

Total Cost

$ 466.67

$ 600

Profit

$ 1,799,533.33

$ 949,400

Increase/ decrease in Profit

$ 1,199,766.67

$ 1,049,400

Profit of Company

Current

$ 3,900,000

$ 3,900,000

$4,998,100

$ 12,798,100

Proposed

3600000

3800000

$ 2,748,933.33

$ 10,148,933.33

Profit of Divisions

$ 300,000

$ 100,000

$ 2,249,167

$ 2,649,166.67

From the above tables, it can be observed that the proposal is increasing the profit of all the divisions that include Division A, Division B and Division C. Moreover, it is also observed that the proposal is also increasing the profit of the company that is by $ 2,649,166. Therefore, the company should accept the proposal that is:

Division C will continue to produce parts 101 and 201. All of its production will be sold to Divisions A and B. No other customers are likely to found for these products in the short term given that supply is greater than demand in the market.

Division C will manufacture 2,000 units of part 101 for the Division A and 500 units of part 201 for the Division B.

Division A will buy 2,000 units of part 101 from Division C and 2,000 units from an external supplier at $ 900 per unit.

Division B will buy 500 units of part 201 from Division C and ...