Teslum Inc. has a number of divisions, including the Machina Division, a producer of high-endespresso makers, and the Java Division, a chain of coffee shops.Machina Division produces the EXP-100 model espresso maker that can be used by JavaDivision to create various coffee drinks. The market price of the EXP-100 model is $950, andthe full cost of the EXP-100 model is $475.Required:1. If Teslum has a transfer pricing policy that requires transfer at full cost, what will thetransfer price be? Do you suppose that Machina and Java divisions will choose to transferat that price?2. If Teslum has a transfer pricing policy that requires transfer at market price, what wouldthe transfer price be? Do you suppose that Machina and Java divisions would choose totransfer at that price?3. Now suppose that Teslum allows negotiated transfer pricing and that Machina Divisioncan avoid $135 of selling expense by selling to Java Division. Which division sets theminimum transfer price, and what is it? Which division sets the maximum transfer price,and what is it? Do you suppose that Machina and Java divisions would choose to transfersomewhere in the bargaining range?
Teslum Inc. has a number of divisions, including the Machina Division, a producer of high-end
espresso makers, and the Java Division, a chain of coffee shops.
Machina Division produces the EXP-100 model espresso maker that can be used by Java
Division to create various coffee drinks. The market price of the EXP-100 model is $950, and
the full cost of the EXP-100 model is $475.
Required:
1. If Teslum has a transfer pricing policy that requires transfer at full cost, what will the
transfer price be? Do you suppose that Machina and Java divisions will choose to transfer
at that price?
2. If Teslum has a transfer pricing policy that requires transfer at market price, what would
the transfer price be? Do you suppose that Machina and Java divisions would choose to
transfer at that price?
3. Now suppose that Teslum allows negotiated transfer pricing and that Machina Division
can avoid $135 of selling expense by selling to Java Division. Which division sets the
minimum transfer price, and what is it? Which division sets the maximum transfer price,
and what is it? Do you suppose that Machina and Java divisions would choose to transfer
somewhere in the bargaining range?
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