Transfer pricing. The consulting group in an accounting firm offers its products to outside clients at a price of $200 per hour. Last month, the consultants billed 10,000 hours to outside clients, incurred variable costs of $70 per hour billed to outside clients, and incurred
$500,000 in fixed costs.
The firm's auditing group can acquire consulting services from outsiders or from the firm's own consultants. If it acquires the services from outsiders, it must pay $180 per hour. It would pay $200 for consulting services from the internal group.
a. What are the costs and benefits of the alternatives available to these two groups, the consultants and the auditors, and to the accounting firm as a whole, with respect to consulting services? Assume the consulting group operates at capacity.
b. How would your answer change if the accounting firm's consulting group had sufficient idle capacity to handle all the auditors' needs?