Tasman Teleco Ltd has two divisions and operates out of Auckland, New Zealand. The Express Division manufactures and transfers a range of computer circuit boards to the Harris Division, which uses those circuits to produce telecommunications equipment for the Asia-Pacific market. The Express Division is operating at full capacity. One circuit board that it transfers to the Harris Division—circuit ABZ—has variable costs of $32 per unit, and it can be sold in the external market to other companies in the computer industry for $40 unit.

To produce its final product, the Harris Division incurs additional variable manufacturing and selling costs of $65 per unit and sells the final product to the external market for $120 per unit.

The Harris Division has just been contacted by a Malaysian-based company that is offering a product similar to circuit ABZ at the very competitive price of $28. The manager of the Harris Division is very keen to take up this offer.

Required:

(a) Calculate the transfer price for circuit ABZ, using the general transfer pricing rule, assuming that the Express Division has no spare capacity. 

(b) Recalculate the transfer price using the general transfer pricing rule, assuming the Express Division has spare capacity and has no other opportunities for that capacity. 

(c) Calculate the transfer price if the company policy for transfer pricing is variable cost plus 20 per cent. Is the internal transfer likely to take place?

Answer rating: 100% (QA)

a The transfer price for circuit ABZ using the overall transfer pricing rule assuming that the Ex... View the full answer