Transfer Pricing – an illustration
Campbell Confectionery Company (CCC) manufactures a range of chocolate based products * The company has 2 profit centres, where managers have autonomy in decision making * Processing Division (comes first, processing transfer) * Chocolate Division (comes next, chocolate receive) * The Processing Division processes raw cacao beans into “Chocolate Liquor” * The Chocolate Division uses Chocolate Liquor as an ingredient in its products * The Processing Division has the following options * Sell Chocolate Liquor to an external market * Transfer Chocolate liquor internally to the Chocolate Division * The Chocolate Division has the following options * Purchase Chocolate Liquor internally from the Processing Division * Purchase Chocolate Liquor from an external market
Profit is the only critical thing
Profit is the only critical thing

4 PARTIES RELEVANT COSTS

* The first issue to address IS NOT the transfer price itself * First we must determine, from a corporate perspective, whether the transfer should actually take place– i.e. The Optimal Sourcing Decision * Should the Processing and Chocolate Divisions undertake an internal transfer of the Chocolate Liquor? OR * Should the Processing Division sell and the Chocolate Division purchase the Chocolate Liquor externally?
Information required to make the optimal sourcing decision
Costs of Processing Cacao Beans into 1 litre of Chocolate Liquor
Cacao beans (1.2 kgs @ $3.00 kg) $3.60
Other direct materials $0.80
Conversion costs $1.10 (Conversion costs = DL + MOH)
Fixed manufacturing costs allocated $1.00 (Don’t put in, not relevant)
Packaging costs (10% fixed) $0.80
Selling & admin (30% fixed) $0.90 (Do not take into account)
Most likely sell externally, therefore it is