Zumwald Ag

In: Business and Management

Submitted By aurorawing
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1. A transfer price is the price of a product or service that is sold internally within a firm between financial responsibility centres. Transfer prices are important because they include cost information for inputs provided internally that can help managers make better decisions by assessing the profitability of the output that uses this input. This helps both the buying and selling managers decide how much product to buy/sell internally in order to maximize profit or some other performance measure. Transfer prices also affect the performance measure of the managers of both the buying and selling financial responsibility centre.

There are several different ways to set transfer prices: market price, marginal cost, full cost, full cost plus markup, negotiated, etc. Which one is chosen depends on which fits the situation and goal of the financial responsibility centre the best. Full cost plus markup transfer prices help managers measure how viable a product/service is in the long term. For a product to be viable, it has to be able to recover its full cost plus make a profit. If full cost plus markup transfer price is too expensive for the buying profit centre, then perhaps the product/service is not viable and the selling profit centre should be closed down and the buying profit centre should buy from outside.

a. The sourcing decision best for the ISD is to source to Display Technologies Plc in order to minimize cost. The decrease in cost increases profitability and can result in a higher performance bonus for the manager of the ISD.
b. The sourcing decision best for the Heidelberg division is for ISD to source from them. The Heidelberg division has not been doing very well and can really use the revenue. As well, the Heidelberg division currently has excess capacity.
c. The sourcing decision best for the ECD division depends on if the display imaging…...

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