Assume that all of the plastic containers produced can be sold to external customers for $12 each. The Chemical Division wants to buy 20,000 containers per year. What should the transfer price be? Briefly explain
To determine the appropriate transfer price, we need to consider certain factors and approaches. A transfer price is the price set for goods or services transferred between divisions within the same company. It should be set at a fair and reasonable value to ensure that both divisions benefit.
One common approach is the "market-based approach." In this case, the Chemical Division wants to buy 20,000 plastic containers from another division. If these containers can be sold to external customers for $12 each, we can use this external market price as a basis for setting the transfer price.
So, the transfer price for the plastic containers should ideally be $12 each, since this is the price available to external customers. This assumes that the internal divisions operate in a competitive market environment and that the Chemical Division is willing to pay the same price.
However, it's important to note that other approaches, such as cost-based or negotiated-based, might also be considered depending on the specific circumstances, business strategy, and internal policies of the company.
In summary, the transfer price for the plastic containers should be set at $12 each, reflecting the market price available to external customers unless there are other valid reasons to deviate from this pricing approach.