razor holdings adopts a transfer pricing policy under which each of its subsidiaries 635748

Razor Holdings adopts a transfer pricing policy under which each of its subsidiaries can add a 30% margin to the additional costs transferred to buying subsidiaries. In the following scenario, its Lead Supply subsidiary sends lead components to Entwhistle Electric, which incorporates the lead into its batteries. Entwhistle sends the batteries to Green Lawn Care, which includes the batteries in its electric lawn shears.

	Lead Supply	Entwhistle Electric	Green Lawn Care
Transferred cost	$0	$5.85	13.98
Additional cost	4.50	6.25	15.00
30% markup	1.35	1.88	4.50
Transfer price	$5.85	$13.98	$33.48

Unfortunately, the market price for electric lawn shears is $30, so the Green Lawn Care subsidiary will only earn a profit of $1.02, or 3%, on each sale. However, the company as a whole will earn a profit of $4.25 ($1.35 for Lead Supply + $1.88 for Entwhistle + $1.02 for Green), or 14%.

Thus, Green Lawn Care likely questions why it is bothering to sell electric lawn shears, while corporate management is somewhat more pleased with the overall result.