Appendix 12A: Transfer Pricing
Case Study: Ginger Beer Transfer pricing
Dranik Corporation owns restaurants and food and beverages manufacturers. One of the restaurant business
units, Dranik Pizza, serves ginger beer as one of its beverages. Dranik Pizza can either choose to buy from
an outside supplier or purchase from one of the subsidiaries of Dranik, Dranik Ginger Beer. They are
currently purchasing from an outside supplier at $18 per barrel. The head office suggests that Dranik Pizza
can purchase from an inside supplier. The managers of the pizza and ginger beer units meet to negotiate a
transfer price based on the price and cost information as follows:
Dranik Ginger Beer
Capacity per month
10,000 barrels
Selling (Market) Price
$20 per barrel
Variable Cost
$8 per barrel
Fixed Cost per month
$70,000
Dranik Pizza
Monthly purchasing
2,000 barrels
Purchasing price
$18 per barrel
The determinants of a negotiated transfer price include market selling price, purchasing price,
production cost, and capacity.
Questions:
(1)
What is the bargaining range of the transfer price with adequate idle capacity (in the selling unit)?
(2)
What is the bargaining range of the transfer price with “no” idle capacity (in the selling unit)?
(3)
What is the bargaining range of the transfer price with “some” idle capacity (in the selling unit)?
(4)
What is the bargaining range of the transfer price when there is no outside supplier for the buying
unit?
Case I: With market price, outside supplier, and adequate idle capacity.
Lowest Acceptable Price (of selling division)
Highest Acceptable Price (of purchasing division)
Price Range
?
?
?  negotiated transfer price  ?
Case II: With market price, outside supplier, and no idle capacity
Lowest Acceptable Price (of selling division)
Highest Acceptable Price (of purchasing division)
Price Range
?
?
?  negotiated transfer price  ?
Case III: With market price, outside supplier, some idle capacity
Suppose Dranik Beverage is selling 9,000 barrels a month on the outside market. Therefore,
supplying 2,000 barrels to Dranik Pizza would require Dranik Beverage to take 1,000 barrels of
capacity from its regular customers.
Lowest Acceptable Price (of selling division)
Highest Acceptable Price (of purchasing division)
Price Range
?
?
?  negotiated transfer price  ?
Case IV: With market price, no outside supplier
Lowest Acceptable Price (of selling division)
Highest Acceptable Price (of purchasing division)
Price Range
2/16/2016
?
?
?  negotiated transfer price  ?
Case I: With market price, outside supplier, and idle capacity.
Lowest Acceptable Price (of selling division)
Highest Acceptable Price (of purchasing division)
Price Range
$8
$18
$18  negotiated transfer price  $8
Case II: With market price, outside supplier, and no idle capacity
Lowest Acceptable Price (of selling division)
Highest Acceptable Price (of purchasing division)
Price Range
$8 + ($20-$8)*2,000/2,000 = $20
$18
No feasible range exists
Case III: With market price, outside supplier, some idle capacity
Suppose Dranik Beverage is selling 9,000 barrels a month on the outside market. Therefore,
supplying 2,000 barrels to Dranik Pizza would require Dranik Beverage to take 1,000 barrels of
capacity from its regular customers sales.
Lowest Acceptable Price (of selling division)
Highest Acceptable Price (of purchasing division)
Price Range
$8 + ($20-$8)*1000/2000 = $14
$18
$18  negotiated transfer price  $14
Case IV: With market price, no outside supplier
The highest price that the buying division would be willing to pay depends on contribution margin
of the buying division.
Lowest Acceptable Price (of selling division)
Highest Acceptable Price (of purchasing division)
Price Range
2/16/2016
$8 or $20 or $14 [depends on external
demand situation]
p – v except for the transfer price
(see above)  negotiated transfer price 
(see above)