AC505 Unit 5 Transfer Pricing Problem Example

Course	AC505 Advanced Managerial/Cost Accounting
Unit	Unit 5
Paper type	Transfer pricing problem
Length	About 550 words, 5 pages double-spaced
Format	APA 7 student paper
School	Purdue University Global
Program	MS in Accounting
Updated	October 2026

Free sample paper for AC505 Unit 5

Partial Idle Capacity and a $3.79 Floor: A Unit 5 Transfer Pricing Problem on Roasted Almonds

[Student Name]

Purdue University Global

AC505: Advanced Managerial/Cost Accounting

Unit 5 Transfer Pricing Problem

[Instructor Name]

[Date]

Harrow Creek Nut Company, its divisions, the outside roaster and every figure are composite; the textbooks and article cited are real.

What this part is doingStating the floor, the policy price and the outside price in the lead shows the conflict the problem resolves.

The Facts

Roasted almonds cost the ingredients division $3.35 a pound in variable production cost. Outside customers pay $4.60, and each outside sale carries $0.15 of variable selling cost, mostly broker commission, which internal transfers avoid. The roasting line can process 3,000,000 pounds a year, and outside customers take 2,640,000, leaving 360,000 pounds idle. The consumer division needs 600,000 pounds for almond butter and can buy them from an outside roaster at $4.50 delivered. Company policy sets transfer prices at full cost plus 10 percent, which comes to $4.62.

The Floor: The Selling Division's Minimum

The minimum price the ingredients division should accept equals the variable cost of the transferred pounds plus the contribution it gives up on any outside sales those pounds displace (Datar & Rajan, 2021).

The first 360,000 pounds use idle capacity. They cost $3.35 each and displace nothing.

The remaining 240,000 pounds must come from capacity now serving outside customers. Each of those pounds gives up the outside contribution of $4.60 less $3.35 of production cost and $0.15 of selling cost, or $1.10. The lost contribution is 240,000 times $1.10, or $264,000.

Total cost to the company of the transfer: 600,000 pounds at $3.35, or $2,010,000, plus $264,000 of lost contribution, $2,274,000. Spread over 600,000 pounds, the floor is $3.79 a pound.

The floor sits between the idle-capacity price of $3.35 and the full-capacity price of $4.45 because only 40 percent of the order displaces outside customers, so the opportunity cost is averaged over the whole transfer.

What this part is doingThe highlighted sentence explains why partial capacity gives a blended floor, the key concept in this problem.

The Ceiling: The Buying Division's Maximum

The consumer division should not pay more than the $4.50 it can obtain outside. The negotiating range is therefore $3.79 to $4.50 a pound.

The Range Diagram

On a line from $3.35 to $4.62, the floor sits at $3.79 and the ceiling at $4.50. The policy price of $4.62 lies above the ceiling. Any price inside the range leaves both divisions better off than dealing outside, and the company as a whole gains $0.71 a pound, or $426,000 a year, from transferring internally rather than buying from the outside roaster.

Why the Policy Price Fails

At $4.62, the consumer division's manager will rationally buy from the outside roaster at $4.50. The company then pays $2,700,000 to an outsider for almonds it could have supplied for $2,274,000, a loss of $426,000 caused by the policy, not by either manager's judgment. Full-cost-plus prices also charge the buyer for fixed roasting costs that do not change with the transfer (Eccles, 1985).

Two Short Letters

To the ingredients division manager. A price of $4.10 a pound would give your division $186,000 more than it earns without the transfer, covering the $264,000 of outside contribution you give up and adding margin on the idle capacity.

To the consumer division manager. At $4.10 you save $240,000 a year against the outside roaster, and you keep supply in house, with the food safety and allergen controls you already trust (Hilton & Platt, 2020).

What this part is doingEnding on a negotiated price that benefits both managers shows the analysis produces a workable answer.

References

Datar, S. M., & Rajan, M. V. (2021). Horngren's cost accounting: A managerial emphasis (17th ed.). Pearson.

Eccles, R. G. (1985). The transfer pricing problem: A theory for practice. Lexington Books.

Hilton, R. W., & Platt, D. E. (2020). Managerial accounting: Creating value in a dynamic business environment (12th ed.). McGraw Hill.

AC505 Unit 5 instructions, in plain terms

The fifth AC505 unit asks you to determine a transfer price range and evaluate a transfer pricing policy. State the facts: the selling division's variable cost, outside price and selling costs avoided internally, its capacity and outside sales, the buying division's needs and its outside alternative, and the current policy. Compute the floor as variable cost plus the contribution lost on any displaced outside sales, spread over the units transferred. Identify the ceiling from the buying division's best outside option. Show the range and explain where the policy price falls. Calculate the company-wide effect of transferring internally versus buying outside, and explain how the policy distorts managers' decisions. Close by proposing a negotiated price and showing each division's gain. Cite cost accounting texts and a transfer pricing source in APA 7.

Inside the AC505 Unit 5 example

The sample's facts give $3.35 of variable cost, a $4.60 outside price with $0.15 of selling cost, 3,000,000 pounds of capacity against 2,640,000 of outside sales, the consumer division's 600,000-pound need, the outside roaster at $4.50 and a $4.62 policy price. The floor calculation charges $3.35 on all 600,000 pounds plus $264,000 of lost contribution on 240,000, reaching $3.79. The highlighted sentence explains the blended floor. The ceiling is $4.50, so the range is $3.79 to $4.50 and the company gains $426,000 from internal transfer. The policy section shows how $4.62 sends the buyer outside. Two letters propose $4.10 and show each division's gain.

Where the points sit in the AC505 Unit 5 rubric

Transfer pricing problems in AC505 earn points for a correct floor under partial capacity and a clear company-wide analysis. Graders check that opportunity cost is charged only on displaced units, that selling costs avoided internally are handled correctly and that the floor is spread over the full transfer. The rubric rewards identifying the ceiling from the buyer's real alternative, showing where the policy price falls and quantifying the company's loss from a bad policy. Proposing a price inside the range with each division's gain demonstrates practical judgment. Answers that use variable cost alone, or charge opportunity cost on every unit, are marked down sharply. The cost texts and the transfer pricing source should appear in APA 7.

AC505 Unit 5 help: mistakes that cost points

Common Unit 5 errors include treating the whole order as using idle capacity, which sets the floor too low, or as displacing outside sales entirely, which sets it too high. Selling costs avoided on internal transfers are ignored or double-counted. The ceiling is set at the outside market price for the seller rather than the buyer's actual alternative. The company-wide effect is not computed, so the cost of the policy is never shown. The answer recommends market price without testing whether it falls inside the range. If your section's case has different capacity or a multinational tax angle, a writer can rework the floor, ceiling and policy analysis for your facts.

Get an AC505 Unit 5 example written to your instructions

Capacity facts decide transfer prices, so the Unit 5 case matters most for what it says about idle time, alongside both divisions' costs, outside prices, the volume wanted and the rubric. Floor, ceiling and a defended price are worked out within 24-48h, and a first custom sample is free. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.

More AC505 papers and MS in Accounting samples

AC505 Unit 5 questions, answered

How is the floor calculated when capacity is only partly idle?

Charge variable cost on every unit transferred, add the contribution the seller loses on the units that displace outside sales, and divide by the total transferred. That gives a blended minimum. It sits between the pure idle floor, variable cost alone, and the full-capacity floor, market price less avoided selling cost, in proportion to how much of the order displaces external business.

Why show the company-wide effect?

Because the transfer price only divides profit; it does not create any. The company gains or loses according to whether the transfer happens, and here buying outside would cost it 426,000 dollars a year. Showing that figure explains why headquarters cares about the negotiation and why a price sending the buyer outside is a problem even if one division looks better.

Can a transfer price differ by season?

It can, and where capacity is idle in some months and full in others a seasonal rule often fits better than one annual figure. Lots produced in slack months carry no opportunity cost, so their floor is lower. The trade-off is administrative complexity and the risk that the buying division games its schedule, which the answer should name.

Where can I find a free AC505 Unit 5 sample paper?

This page holds a full AC505 Unit 5 transfer pricing problem for Harrow Creek Nut Company with a partial-capacity floor of $3.79, a $4.50 ceiling, a policy critique, company-wide effects and APA 7 references.

What price does the sample propose, and why?

$4.10 a pound. It sits inside the $3.79 to $4.50 range, gives the ingredients division $186,000 more than it earns without the transfer, and saves the consumer division $240,000 against the outside roaster.