Q.15 Accent Company has two divisions Glass and Florist. The Glass Division makes glass vases, which have the following unit costs:
Variable Cost $2.40
Fixed overhead 1.30
The Florist Division of the company sells cut flowers and uses glass vases. The Florist Division uses 10,000 glass vases annually and currently buys them from an outside supplier for $3.50 each. The Glass Division produces 100,000 glass vases per year and sells them all on the external market for $4.00 each. Vases sold outside incur a sales commission of $0.30 per Vase; this commission would not be paid on internal transfers.
Required:
A. What is the current Transfer Price if the Glass division like to sell 10,000 units to The Florist Division? Explain.
B. Both managers met and agreed on a transfer price of $3.25 per vase. Is this a good idea for each division? Explain.
C. Due to the economic condition The Glass division can only sell 85,000 units to the regular market, should the transfer take place, and if so, what is the transfer price, explain.
Explain with proper and required calculations. Show all formulas used
Transfer pricing is a critical aspect of managing multi-divisional companies, as it involves determining the price at which goods or services are transferred between internal divisions. Accent Company comprises two divisions: Glass and Florist. This essay delves into the assessment of transfer pricing decisions within the context of Accent Company’s divisions, considering various scenarios and their implications.
The Glass Division produces glass vases at a variable cost of $2.40 per vase and incurs a fixed overhead cost of $1.30 per vase. To calculate the current transfer price from the Glass Division to the Florist Division, we need to consider the variable cost, fixed overhead, and sales commission on external sales.
Current Transfer Price = Variable Cost + Fixed Overhead + Sales Commission Current Transfer Price = $2.40 + $1.30 + $0.00 = $3.70 per vase
Explanation: The current transfer price is $3.70 per vase. This price covers both variable and fixed costs incurred by the Glass Division in producing the vases. However, it does not include the sales commission, as internal transfers do not attract this commission. This transfer price would ensure that the Glass Division is adequately compensated for its costs and efforts.
The agreed transfer price of $3.25 per vase needs to be analyzed from the perspective of both divisions.
For the Glass Division: The Glass Division’s variable cost per vase is $2.40, and fixed overhead is $1.30. Therefore, the cost per vase is $2.40 + $1.30 = $3.70. Selling to the Florist Division at $3.25 would lead to a loss of $0.45 per vase ($3.70 – $3.25). This is not a favorable situation for the Glass Division.
For the Florist Division: Buying internally at $3.25 per vase might seem advantageous as it’s cheaper than the current external price of $3.50 per vase. However, this price does not cover the Glass Division’s costs adequately. The Glass Division might not be able to sustain production if it consistently incurs losses on internal sales.
The agreed transfer price of $3.25 per vase is not a prudent decision for either division. It could lead to unsustainable losses for the Glass Division and compromise the quality of the relationship between the two divisions.
Transfer Price Adjustment Due to Economic Conditions
If the Glass Division can only sell 85,000 units to the regular market due to economic conditions, the transfer price needs to be recalculated based on the reduced production volume.
New Variable Cost per Vase = Variable Cost per Vase = $2.40 New Fixed Overhead per Vase = Fixed Overhead per Vase = $1.30
New Transfer Price = New Variable Cost + New Fixed Overhead + Sales Commission New Transfer Price = $2.40 + $1.30 + $0.00 = $3.70 per vase
Explanation: Despite the decrease in external sales, the transfer price remains the same at $3.70 per vase. This maintains consistency and fairness in the internal pricing, ensuring that the Glass Division’s costs are covered.
Transfer pricing decisions are pivotal in maintaining a balanced relationship between divisions in a company. The analysis of different scenarios within Accent Company’s Glass and Florist Divisions demonstrates the importance of ensuring that transfer prices cover costs while promoting the sustainability of both divisions. The optimal transfer price should reflect the actual costs incurred by the supplying division and contribute to the overall success of the organization.
As a renowned provider of the best writing services, we have selected unique features which we offer to our customers as their guarantees that will make your user experience stress-free.
Unlike other companies, our money-back guarantee ensures the safety of our customers' money. For whatever reason, the customer may request a refund; our support team assesses the ground on which the refund is requested and processes it instantly. However, our customers are lucky as they have the least chances to experience this as we are always prepared to serve you with the best.
Plagiarism is the worst academic offense that is highly punishable by all educational institutions. It's for this reason that Peachy Tutors does not condone any plagiarism. We use advanced plagiarism detection software that ensures there are no chances of similarity on your papers.
Sometimes your professor may be a little bit stubborn and needs some changes made on your paper, or you might need some customization done. All at your service, we will work on your revision till you are satisfied with the quality of work. All for Free!
We take our client's confidentiality as our highest priority; thus, we never share our client's information with third parties. Our company uses the standard encryption technology to store data and only uses trusted payment gateways.
Anytime you order your paper with us, be assured of the paper quality. Our tutors are highly skilled in researching and writing quality content that is relevant to the paper instructions and presented professionally. This makes us the best in the industry as our tutors can handle any type of paper despite its complexity.
Recent Comments