akmen

1. Accounting Management
Transfer Pricing
Exercise 10-27

2. Members of group
• Wahyu Agustira Putra (1310531011)
• Muhammad Alghifari (1310531062)
• Yesse Lina Pisi (1310531065)
• Chelsa Ismael (1310532009)
• Letifa Eka Wahyuni (1310532017)
• Maritsa Febra Gemaya (1310532051)

3. 10-27
GreenWorld, Inc., is a nursery products firm. It has three divisions that grow and sell plants:
the Western Division, the Southern Division, and the Canadian Division. Recently, the Southern
Division of GreenWorld acquired a plastics factory that manufactures green plastic pots. These pots
can be sold both externally and internally. Company policy permits each manager to decide
whether to buy or sell internally. Each divisional manager is evaluated on the basis of return on
investment and EVA.
The Western Division had bought its plastic pots in lots of 100 from a variety of vendors. The
average price paid was $75 per box of 100 pots. However, the acquisition made Rosario Sanchez-
Ruiz, manager of the Western Division, wonder whether a more favorable price could be arranged.
She decided to approach Lorne Matthews, manager of the Southern Division, to see if he wanted to
offer a better price for aninternal transfer. She suggested a transfer of 3,500 boxes at $70 per box.
Lorne gathered the following information regarding the cost of a box of 100 pots:
Direct materials $35
Direct labor 8
Variable overhead 10
Fixed overhead* 10
Total unit cost $63
Selling price $75
Production capacity 20,000 boxes

4. Required
1. Suppose that the plastics factory is producing at capacity
and can sell all that it produces to outside customers. How
should Lorne respond to Rosario’s request for a lower
transfer price?
2. Now assume that the plastics factory is currently selling
16,000 boxes. What are the minimum and maximum
transfer prices? Should Lorne consider the transfer at $70
per box?
3. Suppose that GreenWorld’s policy is that all transfer prices
be set at full cost plus 20 percent. Would the transfer take
place? Why or why not?

5. 1(Question)
Suppose that the plastics factory is producing at capacity and can
sell all that it produces to outside customers. How should Lorne
respond to Rosario’s request for a lower transfer price?
Answer
If Lorne can sell all the product to the outside
customers (market), he shouldn't accept the Rosario's
request to reduce the price. Because if Lorne can ell all
the product at price $75, he will get the optimum
profit. But, if he accept the Rosario's request, he only
can sell the product at price $70.

6. 2(Question)
Now assume that the plastics factory is currently selling 16,000
boxes. What are the minimum and maximum transfer prices?
Should Lorne consider the transfer at $70 per box?
Answer
As we know that to produce 1 unit plastic pot, the firm need variable cost:
Direct materials $35
Direct labor 8
Variable overhead 10
Total Variable Cost 53
So, the minimum price is $53
The maximum price as much market price is $75.
But, the ideal price for both division is:70+(75-70)/2=72,5
Ofcourse, Lorne should consider to accept the Rosario's request because the
income will increase by: [3.500(70-53)]=59.500

7. 3(Question)
Suppose that GreenWorld’s policy is that all transfer prices be set
at full cost plus 20 percent. Would the transfer take place? Why
or why not?
Answer
If the price be set at full cost plus 20%, the cost would be:
= Full Cost +Mark up
= 63 + (20% X 63)
= $75,6
No, transfer price will not occur. Because the price higher
than the market price. So, Rosario better buy the product
to the market.

8. Thank you