A finished ACC-653 Topic 7 transfer pricing policy memo example, showing a correct market-price rule driving a division to buy outside and defending a capacity-aware price against dual pricing. Searches like "acc 653 topic 7 assignment example", "acc653 topic 7 sample" and "acc-653 topic 7 example" land here.
What a finished ACC-653 Topic 7 transfer pricing policy memo looks like
Written for the finance chief, the memo puts the loss ahead of the policy. All figures are illustrative. The controls division has capacity for 100,000 boards and outside orders for 70,000; each costs $45 in variable production cost, plus $5 of selling cost when sold outside at $80. Policy sets the internal price at $80, so the assembly division buys its 30,000 boards from a discount supplier at $76, and the company pays $31 a board more than its own idle capacity would have cost. The memo then works the minimum transfer price, variable cost plus opportunity cost: $45 with idle capacity, $75 at full capacity, against the buyer's ceiling of $76. A price of market less the avoided selling cost, $75, keeps the purchase inside in both states.
How an ACC-653 Topic 7 example is structured
Symptom, cause and replacement rule set the memo's order. It opens with the $930,000 annual loss and states that neither division manager erred, which makes the policy rather than the people its subject. The capacity and cost facts follow in a short table for each division. A third part derives the range within which any transfer price leaves the company better off, first with idle capacity and then with the controls division full. Four candidate policies are then tested against that range: the current market price, full cost plus 20 percent, market less avoided selling cost and dual pricing. The fifth part shows each division's profit under the recommended price, since a price one manager will fight rarely survives. The final part recommends that price, defended against dual pricing, the runner-up, with the cost of that option stated.
The loss attributed to the policy
Both managers act rationally under the $80 rule, so the memo treats the $930,000 as a design flaw in the price rather than a failure of divisional judgment.
Capacity decides the minimum price
With 30,000 boards of idle capacity the seller gives up nothing by supplying inside, so its floor is the $45 variable cost, not the $80 market price.
A range tested in both capacity states
The floor rises to $75 when the division is full, and the memo tests every candidate policy against both floors and the buyer's $76 ceiling.
Cost-plus rejected for what it rewards
Full cost plus 20 percent gives a $72 price that keeps the order inside, but it passes the seller's fixed costs and any inefficiency straight to the buyer.
Dual pricing priced before it is set aside
Crediting the seller $80 while charging the buyer $45 satisfies both managers and leaves divisional profits $1,050,000 above the company's own, a gap head office absorbs.
Each division's profit under the new price
At $75 the seller earns $30 a board internally, matching its outside sales, and the buyer saves $1, so neither manager has a reason to route around the rule.
Where marks go in ACC-653 Topic 7
Credit on this memo turns on whether the writer sees that a correct price can still produce the wrong purchase. Papers that defend market-based transfer pricing as objective, without asking whether the seller has idle capacity, recommend the rule that created the loss. Computing the minimum transfer price for one capacity state only leaves the policy untested in the other, and the case is usually built so the answer changes. A recommendation of variable cost transfer, adopted because it makes the company-wide decision correct, ignores that the seller then earns nothing on internal sales and will favor outside customers whenever it can. Dual pricing proposed without stating the profit it leaves unreconciled hides its cost from the reader. Memos that never show each division's result under the proposed price have not checked whether either manager will accept it.
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ACC-653 Topic 7 questions, answered
What is the general rule for a minimum transfer price?
The selling division's floor is its variable cost of the transfer plus the contribution it gives up by supplying inside rather than selling outside. With idle capacity it gives up nothing, so the floor is variable cost alone. At full capacity it gives up the outside contribution. The buying division's ceiling is what it would pay an outside supplier, and any price between the two leaves the company no worse off.
Why not simply let head office decide every internal purchase?
Because decentralization exists to let division managers decide with local knowledge and be judged on the results. Head office can override a sourcing choice, but doing so routinely removes the autonomy the divisional structure was built for and weakens the profit measure used to evaluate the managers. A well-designed transfer price aims to make the choice each manager prefers the choice the company prefers.
Do taxes change the analysis?
Across national borders, often a great deal, since transfer prices shift taxable income between jurisdictions and tax authorities expect them to meet an arm's-length standard. The case in this example involves two domestic divisions, so the memo sets tax aside and says so. Where your case spans countries, many sections expect the tax constraint discussed alongside the incentive question, and the example would add that part.