Clanahan, Inc., has a number of divisions around the world. Division US (in the United States) purchases a component from Division N (in the Netherlands). The component can be purchased externally for $24.50 each. The freight and insurance on the item amount to $2.45; however, commissions of $2.00 need not be paid.
Required:
1. Calculate the transfer price using the comparable uncontrolled price method.
2. Suppose that there is no outside market for the component that Division N transfers to Division US. Further assume that Division US sells the component for $26.00 and normally receives a 30 percent markup on cost of goods sold. Calculate the transfer price using the resale price method.
3. Now assume that there is no external market for the component transferred from Division N to Division US, and that the component is used in the manufacture of another product (i.e., it is not resold). Calculate the transfer price using the cost plus method. Further assume that Division N’s manufacturing cost for the component is $18.20.
4. What if commissions avoided were $2.25 per unit? How would that affect the comparable uncontrolled price? The resale price? The cost-plus price?