Question

Teslum Inc. has a number of divisions, including the Machina Division, a producer of high-end espresso makers, and the Java Division, a chain of coffee shops.

Machina Division produces the EXP-100 model espresso maker that can be used by Java Division to create various coffee drinks. The market price of the EXP-100 model is $950, and the full cost of the EXP-100 model is $475. Required:
1. If Teslum has a transfer pricing policy that requires transfer at full cost, what will the transfer price be?
2. If Teslum has a transfer pricing policy that requires transfer at market price, what would the transfer price be?
3. Now suppose that Teslum allows negotiated transfer pricing and that Machina Division can avoid $135 of selling expense by selling to Java Division.
What is the minimum transfer price?
What is the maximum transfer price?

Answer 1

1. $475

2. $950

3. $815

4. $950 per unit

Step-by-step explanation:

1. If Teslum has a transfer pricing policy that requires transfer at full cost, then,

Transfer price = $475

2. If Teslum has a transfer pricing policy that requires transfer at market price, then,

Transfer price = $950

3. Minimum Transfer price:

= Market price - Selling expense that could be avoided

= $950 - $135

= $815

Maximum transfer price = Market price per unit

= $950 per unit