Blueberry Corporation has a packaging division in Dewia, a country with a tax ra
ID: 2586641 • Letter: B
Question
Blueberry Corporation has a packaging division in Dewia, a country with a tax rate of 25%. It also has a manufacturing division in Glewia, where the tax rate is 40%. Units manufactured in Glewia are shipped to Dewia for packaging and sale. The market price for the unpackaged product is $200, and it costs $75 per unit in variable costs per unit and $35,000 in fixed costs per year to manufacture. It has a market demand of 8,000 units and currently can produce 8,000 units. The packaging division incurs $15 per unit in variable costs in addition to the cost of acquiring the unpackaged product (whether from the manufacturing division or from an external supplier) as well as annual fixed costs of $25,000 if it buys from an outside supplier. It sells the packaged product to consumers for $350 per unit. If the packaging division could buy from the manufacturing division, it could reduce its annual fixed costs by $4,000.
Calculate the transfer price if it is based on variable costs with a 10% markup.
Dollars
2)
Calculate the transfer price if it is based on full costs with a 20% markup.
Dollars
3)
What is the minimum price the manufacturing division will accept in a negotiation?
Dollars
4)
What is the maximum price the packaging division will accept in a negotiation?
Dollars
Explanation / Answer
1. Transfer price based on variable costs with a 10% markup
Variable cost per unit = $75
Markup = 75 x 10% = $7.50
So, transfer price = 75 + 7.50 = $84.50
2. Transfer price based on full costs with a 20% markup
Variable cost per unit = $75
Fixed cost per unit = Total fixed cost / Total units
= 35,000 / 8,000
= $4.375
Total cost per unit = 75 + 4.375 = 79.375
Markup = 79.375 x 20% = $15.875
So, transfer price = 79.375 + 15.875 = $95.25
3. Minimum price which the manufacturing division will accept would be equal to the price it is getting by selling in the market as any price below that will reduce its profits. So, minimum price that manufacturing division will accept is $200.