Internal Transfer Pricing Analysis for Pastry Ltd.
1. What transfer price would the two divisions use under a cost-based transfer pricing policy? Is the transfer likely to occur? Why or why not? 2. What transfer price would the two divisions use under a cost-plus-based transfer pricing approach with a 40% mark-up? Is the transfer likely to occur? Why or why not? 3. What transfer price would the Puff division accept to transfer puff pastry to the Roll division if operating at maximum capacity? Is the transfer likely to occur? Why or why not? 4. What is the minimum transfer price that the Puff division can accept to transfer puff pastry to the Roll division with increased demand? Is the transfer likely to occur? Why or why not?
Cost-based Transfer Pricing
Cost-Plus-Based Transfer Pricing
Using a cost-plus-based approach with a 40% mark-up, the transfer price would be $6.30 per pack ($4.50 + 40% mark-up). Similar to the cost-based pricing, the transfer is unlikely to occur due to the higher internal transfer price compared to the external price.
Maximum Capacity and External Demand
If the Puff division operates at maximum capacity to meet external demand, the transfer price would be at the market price of $4.00 per pack. The division will not accept a lower internal transfer price to maintain its contribution margin. The internal transfer is likely to occur as long as the external demand is met.
Increased Demand Scenario
With increased demand, the Puff division can transfer puff pastry at the market price of $4.00 per pack to the Roll division. This ensures that the division does not lose out on profits from external sales. The internal transfer may occur if the higher demand justifies the internal transfer at market price.