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Transfer-pricing Homework Due November 4

1. AutoTech's Northern Division is currently purchasing a part from an outside supplier.


The company's Southern Division, which has no excess capacity, makes and sells
this part for external customers at a variable cost of $19 and a selling price of $31.
If Southern begins sales to Northern, it will use the general transfer-pricing rule.
On the basis of this information, Southern would establish a transfer price of:
A. $16.
B. $19.
C. $28.
D. $31.
E. some other amount.

2. Danico manufactures tennis clothing. The fabric is produced in the Fabric Division.
The fabric can be transferred to the Jacket Division, where it is sewn into tennis jackets
(each jacket requires two yards of fabric), or it can be sold to an external buyer. Costs are
detailed below:

Fabric Jacket

Direct Material $3/yard $5 (not including fabric)


Direct Labor (variable) $6/yard $15
Variable Overhead $2/yard $7
Sales Price $13/yard $120
Traceable Fixed Costs $1200 $1500
Capacity 12,000 yds. 250 jackets

A. If the Fabric Division is currently producing 10,000 yards each period, what range of
transfer prices will lead to goal congruence? The Jacket division must pay $13 per yard
if it buys the fabric from outside vendors.

B. If the Fabric Division is currently producing 12,000 yards each period, what range of
transfer prices will lead to goal congruence? The Jacket division must pay $13 per yard
if it buys the fabric from outside vendors.

C. If the Fabric Division is currently producing 11,800 yards each period, and the Jacket
Division would like to sell 225 jackets this period, what range of transfer prices will lead
to goal congruence?