Question: Effect of alternative transfer pricing methods on division

Effect of alternative transfer-pricing methods on division operating income. (CMA, adapted) Ajax Corporation has two divisions. The Mining Division makes toldine, which is then transferred to the Metals Division. The toldine is further processed by the Metals Division and is sold to customers at a price of $150 per unit. The Mining Division is currently required by Ajax to transfer its total yearly output of 200,000 units of toldine to the Metals Division at 110% of full manufacturing cost. Unlimited quantities of toldine can be purchased and sold on the outside market at $90 per unit The following table gives the manufacturing cost per unit in the Mining and Metals divisions for 2009:

1. Calculate the operating incomes for the Mining and Metals divisions for the 200,000 units of toldine transferred under the following transfer-pricing methods: (a) market price and (b) 110% of full manufacturing cost.
2. Suppose Ajax rewards each division manager with a bonus, calculated as 1% of division operating income (if positive). What is the amount of bonus that will be paid to each division manager under the transfer-pricing methods in requirement 1? Which transfer-pricing method will each division manager prefer to use?
3. What arguments would Brian Jones, manager of the Mining Division, make to support the transfer-pricing method that heprefers?

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  • CreatedJune 22, 2011
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