Reference no: EM132587144

Question -

1. Please explain how does Effective transfer pricing can enhance a company's overall profitability

2. Does transfer pricing is more profitable in Indonesia? Please explain

3. Division B has asked Division A of the same company to supply it with 10000, units of part P001 this year to use in one of its products. Division B has received a bid from an outside supplier for the parts at a price of $2090, per unit. Division A has the capacity to produce 50000, units of part P001 per year. Division A expects to sell 46000, units of part P001 to outside customers this year at a price $2100, per unit. To fill the order from Division B, Division A would have to cut back its sales to outside customers. Division A produces part P001 at a variable cost of $990, per unit. The cost of packing and shipping the parts for outside customers is $10, per unit. These packing and shipping costs would not have to be incurred on sales of the parts to Division B.

Required -

a. What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 10000, parts this year from Division A to Division B?

b. Is it in the best interests of the overall company for this transfer to take place? Explain.