The Wood division of Darton Inc. produces wood that can be used by manufacturers of various products. The table below provides information about sales and cost data of each wood piece. Selling price per wood piece on the market are £300. Variable costs per wood piece are £230. Fixed costs per wood piece (based on capacity) are £130. Annual capacity in units (i.e. number of wood pieces) are 50,000. The Metal division of Darton Inc. uses wood pieces in the production of one of its products. The Metal division will need 20,000 wood pieces per year. The division has received a quote of £280 per wood piece from an external supplier. Managers are evaluated based on divisional profits.

Selling price per wood	300 pounds
fixed costs based on wood piece based on fixed capacity	130 pounds
Variable costs per wood piece	230 pounds
Annual Capacity in Units	50000

(a) Discuss the need for an appropriate transfer pricing policy and explain the optimal transfer pricing rule under conditions where there is excess capacity and where there is no excess capacity. Use examples from the wood and metal industry to illustrate your answer wherever possible.

(b) Assume the Wood division is able to sell only 30,000 wood pieces per year to outside customers. (i) From the standpoint of the Wood division, what is the lowest acceptable transfer price for wood pieces sold to the Metal division? (ii) From the standpoint of the Metal division, what is the highest acceptable transfer price for wood pieces purchased from the Wood division? (iii) From the standpoint of Darton Inc., should the transfer take place? Why or why not?

(c) Assume that the Wood division is able to sell all the wood pieces it produces to external customers. (i) From the standpoint of the Wood division, what is the lowest acceptable transfer price for wood pieces sold to the Metal division? (ii) From the standpoint of the Metal division, what is the highest acceptable transfer price for wood pieces purchased from the Wood division? (2 marks) (iii) From the standpoint of Darton Inc., should the transfer take place? Why or why not?

(d) Identify and discuss two alternative methods of setting transfer prices.

Answer rating: 100% (QA)

a transfer pricing develops a competitive environment between managers of different divisions many times managers will work only in the best interest of their individual performance this can lead to l... View the full answer