West-Coast Industries is a decentralized firm. It has two production centres: Vancouver and Kamloops. Each one is evaluated based on its return on investment. Vancouver has the capacity to manufacture 100,000 units of component TR222. Vancouver's variable costs are $150 per unit. Kamloops uses component TR222 in one of its products. Kamloops adds $90 of variable costs to the component and sells the final product for $450.
Instructions
Consider the following independent situations:
(a) Vancouver can sell all 100,000 units of TR222 on the open market at a price of $250 per unit. Kamloops is willing to buy 10,000 of those units. What should the transfer price be? Explain your decision.
(b) Of the 100,000 units of component TR222 it can produce, Vancouver can sell 70,000 units on the open market at a price of $250 per unit. Kamloops is willing to buy an additional 10,000 units. What should the transfer price be? Explain your decision.
(c) Of the 100,000 units of component TR222 it can produce, Vancouver can sell 80,000 units on the open market at a price of $250 per unit. Kamloops is willing to buy an additional 30,000 units. What should the transfer price be? Explain your decision.
(d) The head office of West-Coast has asked the two centres to negotiate a transfer price. List the advantages and disadvantages of negotiated transfer prices.