Transfer Pricing
New Zealand Company produces computers and computer components. The company is organized into several divisions that operate essentially as autonomous companies. The firm permits division managers to make investments and production level decisions. The division mangers can also decide whether to sell to other divisions or to outside customers.
Networks Division produces a critical component for computers manufactured by the Computers Division. It has been selling this component to Computers for $3,000 per unit. Networks recently purchased new equipment for producing the component. To offset its higher depreciation charges, Networks increased its price to $3200 per unit. The manager of Networks has asked the president to instruct Computers to purchase the component for the $3200 price rather than to permit Computer to purchase externally for $3000 per unit. The following information is obtained from the company’s records: Computers annual purchases of the components 400 units; Networks variable costs per unit $2400; Networks fixed costs per unit $400
a) Assume that the company has no alternative uses for Network’s idle capacity. Will the company as a whole benefit if Computers purchases the component externally for $3000? Explain
b) Assume that the company ca use the idle capacity of Networks for other purposes, resulting in cash operating savings of $15000. Will the company as a whole benefit if Computers purchases the component externally for $3000. Explain
c) Assume the same facts as in part B except that the outside price drops to $2800 per unit. Will the company as a whole benefit if Computers purchases the component externally for $2800. Explain.