Europa, Inc. Pertinent transfer price. Europa Inc., has two divisions, A and B, which manufacture expensive bicycles.

Division A produces the bicycle frame, and Division B assembles the best rest of the bicycle onto the frame. There is a market for both the subassembly and the final product. Each division has been desi nated as a profit center. The transfer price for the subassembly has been set at the lon !run avera e market price. The followin data are available to each division" Estimated sellin price for the final product &on !run avera e sellin price for intermediate product (utlay costs for completion in Division B (utlay costs in Division A The mana er of Division B has made the followin calculation" +ellin price!!!final product Transferred!in costs ,market(utlay costs for completion .ontribution ,loss- on product #$%% #'%% )*% $*% #,*%#$%% '%% )*% )'%

Required 1. +hould transfers be made to Division B if there is no excess capacity in Division A/ Is the market price the correct transfer price/ 2. Assume that Division A0s maximum capacity for this product is ),%%% units per month and sales to the intermediate market are now 1%% units. +hould '%% units be transferred to Division B/ At what transfer price/ Assume that for a variety of reasons A will maintain the #'%% sellin !price indefinitely2 that is, A is not considerin cuttin the price to outsiders even if idle capacity exists. 3. +uppose A 3uoted a transfer price of #)*% for up to '%% units. 4hat would be the contribution to the company as a whole if the transfer were made/ As mana er of B, would you be inclined to buy at #)*%/

Pricing in imperfect markets. 5efer to the Europa problem above. Required 1. +uppose the mana er of Division A has the option of ,a- cuttin the external price to #)6* with the certainty that sales will rise to ),%%% units or ,b- maintainin the outside price of #'%% for the 1%% units and transferrin the '%% units to Division B at some price that would produce the same operatin income for Division A. 4hat transfer price would produce the same operatin income for Division A/ Does that price coincide with that produced by the 7 eneral uideline7 in the chapter, so that the desirable decision for the company as a whole would result/ 2. +uppose that if the sellin price for the intermediate product is dropped to #)6*, outside sales can be increased to 6%% units. Division B wants to ac3uire as many as '%% units if the transfer price is acceptable. 8or simplicity assume that there is no outside market for the final )%% units of Division A capacity. a. 9sin the 7 eneral uideline,7 what is ,are- the transfer price,s- that should lead to the correct economic decision/ I nore performance evaluation considerations. b. .ompare the total contributions under the alternatives to show why the transfer price,srecommended lead,s- to the optimal economic decision.