Accounting

Transfer Pricing Case Study; Coffee Makers Incorporated

The decision to make or purchase a good that can, or already is supplied internally requires careful consideration. Different departments may look at the issue differently, especially if the internal transfer pricing does not reflect the market conditions. However, although different departments may have different budgets, the firm will also need to take a broader view and consider the bottom line for the firm.

In this case Coffee Makers Incorporated (CMI) is considering the position of three divisions; Divisions A and B. are both buying parts from Division C. Division A buys part 101, for a transfer price of $1,000, and Division B. buys part 201 for a transfer price of $2,000. Both divisions are under pressure to increase their profitability so when the opportunity for division A to purchase part 101 externally for $900, and division B. has the opportunity to...
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