# Cost Based Transfer Pricing

Submitted By rupagurung
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Miliken Inc. is a manufacturer of heart diagnostic equipment. The TA24 machine is manufactured at the company’s plant in
Vancouver and distributed across North America. Miliken sells 3,000 TA24 machines in a typical year. Parts for the machine are either outsourced or manufactured at the company’s Winnipeg division plant. The pump is one such component. The Winnipeg division receives input material for the pumps from various sources across Canada.
Winnipeg Division: The Winnipeg division receives inputs at an accumulated cost of \$140 per pump. The additional cost of manufacturing the pump is \$70 variable cost and \$90 fixed cost per pump. The goods are then shipped to the Vancouver plant at a cost of \$5 per pump.
Vancouver Division : The received pumps are assembled along with other parts. The other parts have a combined cost of \$450 per pump variable cost, and \$900 fixed cost. The assembled TA24 machine is then sold for a price of \$2,500 per pump. The Vancouver division also knows that a Toronto-based company is willing to sell heart pumps to Miliken at a price of \$425 per pump. Following are the three methods for transfer prices that can be considered in this scenario:
1. Market-based — Vancouver can buy the pumps at an outside price of \$425. file:///F|/Courses/2009-10/CGALU/MA2/06course/01mod/m06t02.htm file:///F|/Courses/2009-10/CGALU/MA2/06course/01mod/m06t02.htm (1 of 3) [05/06/2009 12:18:57 PM] file:///F|/Courses/2009-10/CGALU/MA2/06course/01mod/m06t02.htm 2. Cost-based — The company's senior management considers a cost-based transfer price should be at 125% of full absorption cost. The cost of production is \$140 + \$70 + 90 = \$300 x 1.25 = \$375
3. Negotiated — This is negotiated between cost (\$375) and market (\$425). Assume management splits the difference at \$400.
Using market-based transfer prices generally leads to the most optimal pricing…...

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