This problem illustrates some complexities involved in transfer pricing when

This problem illustrates some complexities involved

This preview shows page 3 - 4 out of 4 pages.

This problem illustrates some complexities involved in transfer pricing when two internal divisions become involved. In determining the appropriate selling price, the Electronics Division and the Copy Products Division must consider the following: • The first question to raise is why the Electronics Division cares about the transfer price. Being a cost center, Electronics should be evaluated on costs, not profits. The first thing to investigate is whether the partitioning of decision rights and the performance evaluation systems are properly aligned. • Taking the Siviy work raises volume in the Electronics division from 75 percent to 90 percent. Are marginal costs constant as output is increased? If not, then the price being quoted of allocated fixed costs plus variable cost is unlikely an accurate estimate of how costs actually will behave when this contract is added. • There will be additional transaction costs incurred as a result of dealing with a non- Levis intermediary, such as billings, accounts receivable, transportation and shipping, etc. • The stability of the work force within the Electronics Division must be considered. Will the added workload cause additional hiring or overtime or will it allow for better utilization of the existing work force? Without this added work, will Electronics be facing downsizing actions?
Image of page 3
Image of page 4

You've reached the end of your free preview.

Want to read all 4 pages?

  • Fall '18
  • Economics, cost centers, Electronics Division, Copy Products

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes
A+ icon
Ask Expert Tutors