9781118041581

TRANSFER PRICING: A NUMERICAL EXAMPLELet the demand for copiers be

given by P 4,000 3Q, where Q is the number of copiers demanded per

week and P is the price in dollars. The total cost of assembling copiers (exclud-

ing the cost of microchips) is given by CA360,000 1,000Q. The cost of

producing microchips is CM40,000 200QM .5QM^2 , where QMis the

quantity of chips. Suppose each copier uses onemicrochip. The total cost of

producing copiers is CTCACM400,000 1,200Q  .5Q^2. In turn,

the marginal cost of copiers is MCTdCT/dQ 1,200 Q. Equivalently,

MCTMCAMCM1,000 (200 Q) 1,200 Q. Setting MR MCT

implies 4,000 6Q 1,200 Q. Thus, Q* 400 and P* 4,000 (3)(400) 

$2,800. At a production rate of 400 microchips per week, marginal cost is

276 Appendix to Chapter 6 Transfer Pricing

Dollars per Unit of Output

P*

Q*

Marginal

revenue

Demand

PT=MCM

MCM

MCT

MCA

⎧ ⎪ ⎪ ⎨ ⎪ ⎪

⎧⎪ ⎩

⎨

⎪

⎩

Output

FIGURE 6A.1

Transfer Pricing

In the absence of an

external market, the

optimal transfer price

for an intermediate

product equals the

item’s marginal cost of

production. Optimal

output of the firm’s final

product occurs at Q*,

where MR equals MCT.

Here MCTincludes the

intermediate good’s

transfer price.

c06CostAnalysis.qxd 9/29/11 1:46 PM Page 276