Calculating Transfer Price
Not what you're looking for?
A firm has two semi-autonomous divisions: production and marketing. The production division manufactures a product that is purchased and then resold by the marketing division. The marginal cost functions for the production division and for the value added by the marketing division are defined below.
MCP = 2Q MCM = Q
The demand function for the product is:
QD = 100 - P
a) Assume that there is no external market for the output of the production division. How many units should be produced and what transfer price should be paid to the production division by the marketing division?
b) Assume that the external market for the output of the production division is perfectly competitive and that the market price is $52. How many units should be produced by the production division, how many should be purchased by the marketing division, what transfer price should be paid to the production division by the marketing division, and what price should be charged for the product by the marketing division?
Purchase this Solution
Solution Summary
Solution determines the transfer prices in case of with and without presence of external market.
Solution Preview
a. Assume that there is no external market for the output of the production division. How many units should be produced and what transfer price should be paid to the production division by the marketing division?
In case of absence of external market, Transfer price=Marginal Cost of production division=2Q
Total marginal cost of marketing division=MCT=Transfer price+ marginal cost of value addition
MCT=2Q+MCM=2Q+Q=3Q
QD=100-P
On rearranging, we get
P=100-QD
Total Revenue=TRM=P*QD=(100-QD)*QD=100QD-QD^2
Marginal Revenue=MR=dTRM/dQD=100-2QD
If output of marketing division is Q, ...
Education
- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
Recent Feedback
- "Thank you"
- "Really great step by step solution"
- "I had tried another service before Brain Mass and they pale in comparison. This was perfect."
- "Thanks Again! This is totally a great service!"
- "Thank you so much for your help!"
Purchase this Solution
Free BrainMass Quizzes
Basics of Economics
Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.
Pricing Strategies
Discussion about various pricing techniques of profit-seeking firms.
Elementary Microeconomics
This quiz reviews the basic concept of supply and demand analysis.
Economic Issues and Concepts
This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.
Economics, Basic Concepts, Demand-Supply-Equilibrium
The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.