Question Tag: Opportunity Cost

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PM – Nov 2024 – L2 – Q5 – Risk Management

Financial evaluation and credit terms review for a new customer order in Vena Plc.

Question

Vena Plc. manufactures engineering equipment. The company has received an order from a new customer for 5 machines at N5,000,000 each. Vena Plc.’s terms of sale are 10 percent of the sales value payable with order. The deposit has been received from the new customer. The balance is payable 12 months after acceptance of the order by Vena Plc.

Vena Plc.’s past experience has been that only 60 percent of similar customers pay within 12 months. Customers who do not pay within 12 months are referred to a debt collection agency to pursue the debt. The agency has in the past had a 50 percent success rate of obtaining immediate payment once they became involved. When they are unsuccessful, the debt is written off by Vena Plc. The agency’s fee is N500,000 per order, payable by Vena Plc. with the request for service. This fee is not refundable if the debt is not recovered.

You are an accountant in Vena Plc.’s credit control department, and based on the company’s past experience and discussions with the sales and credit managers, you do not expect the pattern of payment and collection to change.

Incremental costs associated with the new customer’s order are expected to be N3,600,000 per machine; 70 percent of these costs are for materials and are incurred shortly after the order has been accepted. The remaining 30 percent is for all other costs, which you can assume are paid shortly before delivery in 12 months’ time. The company is not presently operating at full production capacity.

A credit bureau has offered to provide an error-free credit information about the new customer if the price is right.

Vena Plc.’s opportunity cost of capital is 16 percent. Ignore taxation.

Required:

a. Write a report to the Credit Control Manager evaluating, from a purely financial point of view, whether Vena Plc. should accept the order from the new customer based on the information provided. (12 Marks)

b. Comment on what other factors should be considered before a decision to grant credit is taken. (3 marks)

Answer

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Tags: Credit Evaluation, Credit terms, Opportunity Cost, Payment Collection, Risk Assessment
Level: Level 2

Topic: Risk Management

PM – Nov 2014 – L2 – Q1 – Divisional Performance Measurement

Analyze transfer pricing impact on divisional performance and group profitability with tax implications for cross-border divisions.

Question

Naijax Group Limited has been in operation since 1980, playing a leading role in the automobile industry.

Division “X,” which is part of the group, manufactures only “265 by 16’’ Rim tyre, which it sells to external customers and also to Division “Y,” another member of the group. Naijax Group’s policy is that:

Divisions have the freedom to set transfer prices and choose their suppliers.
It uses Residual Income (RI) for performance appraisals.
The group’s cost of capital is 12% per annum.

The two divisions’ operating data are as follows:

Division X
Budgeted information for the coming year:
Maximum capacity	150,000 tyres
External sales	110,000 tyres
External selling price	N35,000 per tyre
Variable cost	N22,000 per tyre
Fixed costs	N1,080,000,000
Capital employed	N3,200,000,000
Target residual income	N180,000,000

Division Y has found two other companies willing to supply tyres:

Adex Limited could supply at N28,000 per tyre, but only for annual orders in excess of 50,000 tyres.
Banaxa Limited could supply at N33,000 per tyre for any quantity ordered.

Required:

(a) If Division Y provisionally requests a quotation for 60,000 tyres from Division X for the coming year:

i. Determine the transfer price per tyre that Division X should quote in order to meet its residual income target. (9 Marks)

ii. Calculate the TWO prices that Division X would have to quote to Division Y if it becomes the group’s policy to quote transfer prices based on opportunity costs. (2 Marks)

(b) Evaluate the impact of the group’s current and proposed policies on the profits of Divisions X and Y and on group profit. (4 Marks)

c. Assume that Divisions X and Y are based in different countries and consequently pay taxes at different rates: Division X at 55% and Division Y at 25%. If Division X has now quoted a transfer price of N30,000 per tyre for 60,000 tyres, you are required to determine whether it is better for the group if Division Y purchases
60,000 tyres from Division X or from Adex Limited. (15 Marks)

Answer

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Tags: Cross-border taxation, Divisional Profitability, Opportunity Cost, Residual Income, Transfer Pricing
Level: Level 2

Topic: Divisional Performance Measurement, Transfer Pricing

PM – May 2017 – L2 – SA – Q3 – Cost Management Strategies

Calculate relevant cost for engine production for Tadex and factors influencing component opportunity cost.

Question

Tadex Nigeria Limited is an engineering company specializing in building engines for grinding machines. One of the components for building these engines is sourced from Toka Nigeria Limited, a company in the same group as Tadex Nigeria Limited. Each component is transferred to Tadex, taking into account Toka’s opportunity cost of the component. The variable cost for Toka is N280 per component.
A prospective customer has approached Tadex to submit a quotation for a contract to build a new engine. This is a new customer for Tadex, but the directors of Tadex are keen on winning this contract, as they believe it may lead to more contracts in the future. As a result, they intend to price the contract using relevant costs.

The following cost data is provided for the contract:

(i) Production Director’s Salary: Annual salary equivalent to N15,000 per 8-hour day.

(ii) Materials for the Contract:
- Material A: 110 square meters needed, with 200 square meters in stock, bought at N120 per square meter. Resale value: N105 per square meter; Replacement cost: N125 per square meter.
- Material B: 30 liters needed, must purchase a minimum of 40 liters at N90 per liter, with no future use after the contract.
- Components from Toka: 60 units at N500 per unit.
(iii) Direct Labor Hours: 240 hours required; 75 hours available as spare capacity. Additional hours are sourced at overtime cost of N140/hour or temporary staff at N120/hour (10 hours supervision by an existing supervisor at N180/hour).

(iv) Machine Hours: 25 hours needed, with the machine leased weekly at N6,000 and sufficient spare capacity. Running cost: N70 per hour.

(v) Fixed Overhead Absorption Rate: N200 per direct labor hour.

Requirements:

a. Calculate the relevant cost of building the new engine and explain why you have included or excluded any costs in your calculations.
(15 marks)

b. Discuss the factors that would be considered by Toka to determine the opportunity cost of the component.
(5 marks)

Answer

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Tags: Cost Analysis, Opportunity Cost, Project Quotation, Relevant Costing
Level: Level 2

Topic: Cost Management Strategies
Series: MAY 2017

PM – May 2023 – L2 – SA – Q3 – Decision Making Techniques

Evaluate the desirability of a contract for Product X by analyzing the labour, material, and overhead costs involved.

Question

Kenny Limited (KL) has been offered a contract that, if accepted, would significantly increase next year’s activity levels. The contract requires the production of 20,000 kg of product X and specifies a contract price of N10,000 per kg. The resources used in the production of each kg of X include the following:

Resources per kg of X:

Labour:

Grade 1: 2 hours
Grade 2: 6 hours

Materials:

Material A: 2 units
Material B: 1 litre

Costs:

Grade 1 Labour: N400 per hour
Grade 2 Labour: N200 per hour
Material A: Replacement cost N1,000 per unit, Net Realisable Value N900
Material B: Replacement cost N3,200 per litre, Net Realisable Value N2,500
Fixed production overheads: N60,000,000 based on 300,000 productive labour hours
Incremental overheads for the contract: N22,800,000
Variable production overheads: N300 per productive labour hour

The contract could also result in a 5,000-unit decrease in sales of another product, Y, which contributes N7,000 per unit in revenue and incurs variable costs of N1,200 and 4 hours of Grade 2 labour per unit. However, avoiding the production of Y will save attributable fixed overheads of N5,800,000.

Required:

a. Advise KL on the desirability of the contract. (8 Marks)
b. Show how the contract, if accepted, will be reported on the routine job costing system used by KL. (6 Marks)
c. Briefly explain the reasons for any differences between the figures used in (a) and (b) above. (6 Marks)

Answer

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Tags: Idle Time, Labour Costs, Materials Costs, Opportunity Cost, Overheads, Relevant Costs
Level: Level 2

Topic: Decision-making techniques
Series: MAY 2023

PM – May 2022 – L2 – SA – Q1C – Costing Systems and Techniques

Explain the concepts

Question

Explain the following concepts:
i. Incremental cost;
ii. Differential cost;
iii. Committed cost;
iv. Sunk cost;
v. Opportunity cost.

Answer

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Tags: Committed cost, Differential Cost, Incremental cost;, Opportunity Cost, Sunk Cost
Level: Level 2

Topic: Costing Systems and Techniques
Series: MAY 2022

PM – May 2019 – L2 – Q5 – Transfer Pricing

Profitability analysis for two divisions, including transfer pricing and external supplier impacts.

Question

TK is a company that produces toy television sets targeting children of the elite. The company has two divisions, Division S and Division B. Division S manufactures components for the televisions and sells components to Division B and to external customers. Division B uses five of the components in each of the toy television sets that it manufactures and sells television sets directly to external customers.

Division S
Budgeted variable manufacturing cost per component (N):

Direct material: 140
Direct labour: 180
Variable overhead: 120

Additional Information:

Fixed costs: N5,600,000
Production capacity: 175,000 components
External demand: 150,000 components
Potential demand from Division B: 80,000 components
Anticipated external market price for a component: N500

Division B

Sales price: N4,500
Budgeted variable manufacturing cost per television (N):
- Direct material: 400
- Direct labour: 620
- Variable overhead: 160

Each toy television set produced needs five components. Fixed costs are budgeted to be N14,600,000 for next year. Annual sales of the toy television sets are expected to be 16,000 units.

Transfer Pricing Policy:

Transfer prices are set at opportunity cost.
Division S must satisfy the demand of Division B before selling components externally.
Division B is allowed to purchase components from Division S or from external suppliers.

Required:
a. Assuming that Division B buys all the components it requires from Division S:
Prepare a profit statement for each division detailing sales and costs, showing external sales and internal company transfers separately where appropriate. (6 Marks)

b. A specialist external supplier has approached Division B and offered to supply 80,000 components at a price of N420 each. The components fulfil the same function as those manufactured by Division S. The manager of Division B has accepted the offer and agreed to buy all the components it requires from this supplier:
i. Produce a revised profit statement for each division and for the total TK company.
ii. Division S has just received an enquiry from a new customer for the production of 25,000 components. The manager of Division S requires a total profit for the year for the division of N4,500,000.

Calculate the minimum price per component to sell the 25,000 components to the new customer that would enable the manager of Division S to meet the profit target. (4 Marks)

Note: This order will have no effect on the divisional fixed costs and no impact on the 150,000 components Division S sells to its existing external customers at N500 per component. Division B will continue to purchase the 80,000 components it requires from the specialist external supplier.

Answer

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Tags: Cost Analysis, Divisional Performance, Opportunity Cost, Profit Calculation, Transfer Pricing
Level: Level 2

Topic: Transfer Pricing
Series: MAY 2019

PM – Nov 2018 – L2 – Q2a and Q2b – Transfer Pricing

Calculate divisional profits and analyze the group impact under different demand scenarios and alternative sourcing options.

Question

X and Y Divisions are two arms of the XY group of companies. X Division manufactures one type of component, which it sells to external customers and also to Y Division.

The following information relates to X Division:

Market price per component: N200
Variable cost per component: N105
Fixed costs: N1,375,000 per period
Demand from Y Division: 20,000 components per period
Capacity: 35,000 components per period

Y Division assembles another type of product, which it sells to external customers. Each unit of that product requires two of the components manufactured by X Division.

The following information relates to Y Division:

Selling price per unit: N800
Variable cost per unit:
- Two components from X: 2 @ transfer price
- Other variable costs: N250
Fixed costs: N900,000 per period
Demand: 10,000 units per period
Capacity: 10,000 units per period

Group Transfer Pricing Policy:

Transfers must be at opportunity cost.
Y must buy the components from X.

Required:

a. Calculate the profit for each division if the external demand per period for the components made by X Division is: i. 15,000 components ii. 19,000 components iii. 35,000 components

b. Calculate the financial impact on the Group if Y Division ignored the transfer pricing policy and purchased the 20,000 components it needs from an external supplier for N170 each. Your answer must consider the impact at each of the three levels of demand (15,000, 19,000, and 35,000 components) from external customers for the components manufactured by X Division.
(3 Marks)

Answer

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Tags: Divisional Profit, External Supplier, Opportunity Cost, Transfer Pricing
Level: Level 2

Topic: Divisional Performance Measurement, Transfer Pricing
Series: NOV 2018

PM – Mar/Jul 2020 – L2 – Q5 – Transfer Pricing for Olascom Nigeria Limited

Calculation of the optimal transfer price for products between divisions at Olascom Nigeria Limited and evaluation of divisional performance.

Question

Olascom Nigeria Limited has two operating divisions, Western division and Eastern division that are treated as profit centres for the purpose of performance reporting. Western division makes two products, Tot and Tal. Tot is sold to external customers for ₦310 per unit. Tal is a part-finished item that is sold only to Eastern division. Eastern division can obtain the part-finished item from either Western division or from an external supplier. The external supplier charges a price of ₦275 per unit.

The production capacity of Western division is measured in total units of output of Tot and Tal. Each unit requires the same direct labour time. The costs of production in Western division are as follows:

Required:
a. What is an optimal transfer price? (4 Marks)
b. What would be the optimal transfer price for Tal if there is spare production capacity in Western division? (4 Marks)
c. What would be the optimal transfer price for Tal if Western division is operating at full capacity due to a limited availability of direct labour, and there is unsatisfied external demand for Tot? (7 Marks)
d. Discuss two methods that can be used to evaluate performance of divisions that operate as investment centres,
(5 Marks)

Answer

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Tags: Divisional Performance, Opportunity Cost, Profit Centres, Transfer Pricing
Level: Level 2

Topic: Transfer Pricing
Series: MAR/JULY 2020

Determine the optimal transfer pricing for consulting services between divisions within KayCee Ltd based on varying capacity scenarios.

Question

The Management Information System (MIS) division of KayCee Ltd provides consulting services to its clients as well as to other divisions within the group. Consultants always work in teams of two on every consulting day. Each consulting day is charged to external clients at GH¢750, which represents cost plus a 150% profit markup. The total cost per consulting day has been estimated to be 80% variable and 20% fixed.

The director of the Human Resources (HR) division of KayCee Ltd has requested the services of two teams of consultants from the MIS division on five days per week for a period of 48 weeks, and has suggested that she meets with the director of the MIS division in order to negotiate a transfer price. The director of the MIS division has responded by stating that he is aware of the limitations of using negotiated transfer prices and intends to charge the HR division GH¢750 per consulting day.

The MIS division always uses Internal video-conference equipment on all internal consultations which would reduce the variable costs by GH¢50 per consulting day.

Note: The conference equipment can only be used when providing internal consultations.

Required:

a) Calculate and discuss the transfer prices per consulting day at which the MIS division should provide consulting services to the HR division in order to ensure that the profit of KayCee Ltd is maximized in each of the following situations:

i) Every pair of consultants in the MIS division is 100% utilized during the required 48-week period in providing consulting services to external clients, i.e. there is no spare capacity.
ii) There is one team of consultants who, being free from other commitments, would be available to undertake the provision of services to the HR division during the required 48-week period. All other teams of consultants would be 100% utilized in providing consulting services to external clients.
iii) A major client has offered to pay the MIS division GH¢264,000 for the services of two teams of consultants during the required 48-week period.

(14 marks)

b) Explain THREE (3) limitations of negotiated transfer prices.

(6 marks)

…

Determine the optimal transfer pricing for consulting services between divisions within KayCee Ltd based on varying capacity scenarios.Read More »

MA – July 2023 – L2 – Q5 – Relevant cost and revenue, Decision making techniques

Calculate the minimum price for a special order using relevant costing principles, and discuss the relevance of fixed costs in decision-making scenarios.

Question

You are the Management Accountant for Darkoah Publishing Ltd which has been asked to send a quotation for the production of a programme for the local village fair. The work would be carried out in addition to the normal work of the company. Because of existing commitments, employees would be required to work during weekends to complete the printing of the programme. A trainee accountant has produced the following cost estimate based upon the resources required as specified by the production manager:

You are aware that considerable publicity could be obtained for the company if you are able to win this order, and the price quoted must be very competitive.

The following notes are relevant to the cost estimate above: i) The paper to be used is currently in stock at a value of GH¢5,000. It is of an unusual colour and has not been used for some time. The replacement price of the paper is GH¢8,000, whilst the scrap value of what is in stock is GH¢2,500. The production manager does not foresee any alternative use for the paper if it is not used for the village fair programme.

ii) The inks required are not held in stock. They would have to be purchased in bulk at a cost of GH¢3,000. However, only 80% of the ink purchased would be used in printing the programme. No other use is foreseen for the remainder.

iii) Skilled direct labour is currently at full capacity, but additional labour can be hired. To accommodate the printing of the programmes, 50% of the time required would be worked at weekends, for which a premium of 25% above the normal hourly rate is paid. The normal hourly rate is GH¢4.00 per hour.

iv) Unskilled labour is presently under-utilised, and at present 200 hours per week are recorded as idle time. If the printing work is carried out at a weekend, 25 unskilled labour hours would have to occur at this time, but the employees concerned would be given two hours’ time off (for which they would be paid) in lieu of each hour worked.

v) Variable overhead represents the cost of operating the printing press and binding machines.

vi) When not being used by the company, the printing press is hired to outside companies for GH¢6.00 per hour. This earns a contribution of GH¢3.00 per hour. There is unlimited demand for this facility.

vii) Fixed production costs are those incurred by and absorbed into production, using an hourly rate based on budgeted activity.

viii) The cost of the estimating department represents time that has already been incurred during discussions with the village fair committee concerning the printing of its programme.

Required: a) Prepare a revised cost estimate using a relevant cash flow approach, showing clearly the minimum price that the company should accept for the order. Give reasons for each resource valuation in your cost estimate. (17 marks)

b) Briefly discuss the statement “fixed costs are never relevant for decision making scenarios”.

(3 marks)

Answer

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Tags: Decision Making, Fixed Costs, Opportunity Cost, pricing decision, Relevant Costing, Sunk Costs
Level: Level 2

Topic: Decision-making techniques, Relevant Cost and Revenue
Series: JULY 2023

PM – Nov 2024 – L2 – Q5 – Risk Management

Financial evaluation and credit terms review for a new customer order in Vena Plc.

Question

A credit bureau has offered to provide an error-free credit information about the new customer if the price is right.

Vena Plc.’s opportunity cost of capital is 16 percent. Ignore taxation.

Required:

b. Comment on what other factors should be considered before a decision to grant credit is taken. (3 marks)

Answer

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Tags: Credit Evaluation, Credit terms, Opportunity Cost, Payment Collection, Risk Assessment
Level: Level 2

Topic: Risk Management

PM – Nov 2014 – L2 – Q1 – Divisional Performance Measurement

Analyze transfer pricing impact on divisional performance and group profitability with tax implications for cross-border divisions.

Question

Naijax Group Limited has been in operation since 1980, playing a leading role in the automobile industry.

Divisions have the freedom to set transfer prices and choose their suppliers.
It uses Residual Income (RI) for performance appraisals.
The group’s cost of capital is 12% per annum.

The two divisions’ operating data are as follows:

Division X
Budgeted information for the coming year:
Maximum capacity	150,000 tyres
External sales	110,000 tyres
External selling price	N35,000 per tyre
Variable cost	N22,000 per tyre
Fixed costs	N1,080,000,000
Capital employed	N3,200,000,000
Target residual income	N180,000,000

Division Y has found two other companies willing to supply tyres:

Adex Limited could supply at N28,000 per tyre, but only for annual orders in excess of 50,000 tyres.
Banaxa Limited could supply at N33,000 per tyre for any quantity ordered.

Required:

(a) If Division Y provisionally requests a quotation for 60,000 tyres from Division X for the coming year:

i. Determine the transfer price per tyre that Division X should quote in order to meet its residual income target. (9 Marks)

ii. Calculate the TWO prices that Division X would have to quote to Division Y if it becomes the group’s policy to quote transfer prices based on opportunity costs. (2 Marks)

(b) Evaluate the impact of the group’s current and proposed policies on the profits of Divisions X and Y and on group profit. (4 Marks)

Answer

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Tags: Cross-border taxation, Divisional Profitability, Opportunity Cost, Residual Income, Transfer Pricing
Level: Level 2

Topic: Divisional Performance Measurement, Transfer Pricing

PM – May 2017 – L2 – SA – Q3 – Cost Management Strategies

Calculate relevant cost for engine production for Tadex and factors influencing component opportunity cost.

Question

Tadex Nigeria Limited is an engineering company specializing in building engines for grinding machines. One of the components for building these engines is sourced from Toka Nigeria Limited, a company in the same group as Tadex Nigeria Limited. Each component is transferred to Tadex, taking into account Toka’s opportunity cost of the component. The variable cost for Toka is N280 per component.
A prospective customer has approached Tadex to submit a quotation for a contract to build a new engine. This is a new customer for Tadex, but the directors of Tadex are keen on winning this contract, as they believe it may lead to more contracts in the future. As a result, they intend to price the contract using relevant costs.

The following cost data is provided for the contract:

(i) Production Director’s Salary: Annual salary equivalent to N15,000 per 8-hour day.

(ii) Materials for the Contract:
- Material A: 110 square meters needed, with 200 square meters in stock, bought at N120 per square meter. Resale value: N105 per square meter; Replacement cost: N125 per square meter.
- Material B: 30 liters needed, must purchase a minimum of 40 liters at N90 per liter, with no future use after the contract.
- Components from Toka: 60 units at N500 per unit.
(iii) Direct Labor Hours: 240 hours required; 75 hours available as spare capacity. Additional hours are sourced at overtime cost of N140/hour or temporary staff at N120/hour (10 hours supervision by an existing supervisor at N180/hour).

(iv) Machine Hours: 25 hours needed, with the machine leased weekly at N6,000 and sufficient spare capacity. Running cost: N70 per hour.

(v) Fixed Overhead Absorption Rate: N200 per direct labor hour.

Requirements:

a. Calculate the relevant cost of building the new engine and explain why you have included or excluded any costs in your calculations.
(15 marks)

b. Discuss the factors that would be considered by Toka to determine the opportunity cost of the component.
(5 marks)

Answer

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Tags: Cost Analysis, Opportunity Cost, Project Quotation, Relevant Costing
Level: Level 2

Topic: Cost Management Strategies
Series: MAY 2017

PM – May 2023 – L2 – SA – Q3 – Decision Making Techniques

Evaluate the desirability of a contract for Product X by analyzing the labour, material, and overhead costs involved.

Question

Resources per kg of X:

Labour:

Grade 1: 2 hours
Grade 2: 6 hours

Materials:

Material A: 2 units
Material B: 1 litre

Costs:

Grade 1 Labour: N400 per hour
Grade 2 Labour: N200 per hour
Material A: Replacement cost N1,000 per unit, Net Realisable Value N900
Material B: Replacement cost N3,200 per litre, Net Realisable Value N2,500
Fixed production overheads: N60,000,000 based on 300,000 productive labour hours
Incremental overheads for the contract: N22,800,000
Variable production overheads: N300 per productive labour hour

Required:

Answer

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Tags: Idle Time, Labour Costs, Materials Costs, Opportunity Cost, Overheads, Relevant Costs
Level: Level 2

Topic: Decision-making techniques
Series: MAY 2023

PM – May 2022 – L2 – SA – Q1C – Costing Systems and Techniques

Explain the concepts

Question

Explain the following concepts:
i. Incremental cost;
ii. Differential cost;
iii. Committed cost;
iv. Sunk cost;
v. Opportunity cost.

Answer

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Tags: Committed cost, Differential Cost, Incremental cost;, Opportunity Cost, Sunk Cost
Level: Level 2

Topic: Costing Systems and Techniques
Series: MAY 2022

PM – May 2019 – L2 – Q5 – Transfer Pricing

Profitability analysis for two divisions, including transfer pricing and external supplier impacts.

Question

Division S
Budgeted variable manufacturing cost per component (N):

Direct material: 140
Direct labour: 180
Variable overhead: 120

Additional Information:

Fixed costs: N5,600,000
Production capacity: 175,000 components
External demand: 150,000 components
Potential demand from Division B: 80,000 components
Anticipated external market price for a component: N500

Division B

Sales price: N4,500
Budgeted variable manufacturing cost per television (N):
- Direct material: 400
- Direct labour: 620
- Variable overhead: 160

Each toy television set produced needs five components. Fixed costs are budgeted to be N14,600,000 for next year. Annual sales of the toy television sets are expected to be 16,000 units.

Transfer Pricing Policy:

Transfer prices are set at opportunity cost.
Division S must satisfy the demand of Division B before selling components externally.
Division B is allowed to purchase components from Division S or from external suppliers.

Calculate the minimum price per component to sell the 25,000 components to the new customer that would enable the manager of Division S to meet the profit target. (4 Marks)

Answer

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Tags: Cost Analysis, Divisional Performance, Opportunity Cost, Profit Calculation, Transfer Pricing
Level: Level 2

Topic: Transfer Pricing
Series: MAY 2019

PM – Nov 2018 – L2 – Q2a and Q2b – Transfer Pricing

Calculate divisional profits and analyze the group impact under different demand scenarios and alternative sourcing options.

Question

X and Y Divisions are two arms of the XY group of companies. X Division manufactures one type of component, which it sells to external customers and also to Y Division.

The following information relates to X Division:

Market price per component: N200
Variable cost per component: N105
Fixed costs: N1,375,000 per period
Demand from Y Division: 20,000 components per period
Capacity: 35,000 components per period

Y Division assembles another type of product, which it sells to external customers. Each unit of that product requires two of the components manufactured by X Division.

The following information relates to Y Division:

Selling price per unit: N800
Variable cost per unit:
- Two components from X: 2 @ transfer price
- Other variable costs: N250
Fixed costs: N900,000 per period
Demand: 10,000 units per period
Capacity: 10,000 units per period

Group Transfer Pricing Policy:

Transfers must be at opportunity cost.
Y must buy the components from X.

Required:

a. Calculate the profit for each division if the external demand per period for the components made by X Division is: i. 15,000 components ii. 19,000 components iii. 35,000 components

Answer

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Tags: Divisional Profit, External Supplier, Opportunity Cost, Transfer Pricing
Level: Level 2

Topic: Divisional Performance Measurement, Transfer Pricing
Series: NOV 2018

PM – Mar/Jul 2020 – L2 – Q5 – Transfer Pricing for Olascom Nigeria Limited

Calculation of the optimal transfer price for products between divisions at Olascom Nigeria Limited and evaluation of divisional performance.

Question

Answer

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Tags: Divisional Performance, Opportunity Cost, Profit Centres, Transfer Pricing
Level: Level 2

Topic: Transfer Pricing
Series: MAR/JULY 2020

Determine the optimal transfer pricing for consulting services between divisions within KayCee Ltd based on varying capacity scenarios.

Question

The MIS division always uses Internal video-conference equipment on all internal consultations which would reduce the variable costs by GH¢50 per consulting day.

Note: The conference equipment can only be used when providing internal consultations.

Required:

(14 marks)

b) Explain THREE (3) limitations of negotiated transfer prices.

(6 marks)

Answer

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Tags: Consulting, Internal services, MIS division, Opportunity Cost, Profit Maximization, Transfer Pricing
Level: Level 2

Topic: Transfer Pricing
Series: NOV 2023

MA – July 2023 – L2 – Q5 – Relevant cost and revenue, Decision making techniques

Calculate the minimum price for a special order using relevant costing principles, and discuss the relevance of fixed costs in decision-making scenarios.

Question

You are aware that considerable publicity could be obtained for the company if you are able to win this order, and the price quoted must be very competitive.

v) Variable overhead represents the cost of operating the printing press and binding machines.

vii) Fixed production costs are those incurred by and absorbed into production, using an hourly rate based on budgeted activity.

viii) The cost of the estimating department represents time that has already been incurred during discussions with the village fair committee concerning the printing of its programme.

b) Briefly discuss the statement “fixed costs are never relevant for decision making scenarios”.

(3 marks)

Answer

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Tags: Decision Making, Fixed Costs, Opportunity Cost, pricing decision, Relevant Costing, Sunk Costs
Level: Level 2

Topic: Decision-making techniques, Relevant Cost and Revenue
Series: JULY 2023

Question Tag: Opportunity Cost

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PM – Nov 2024 – L2 – Q5 – Risk Management

Financial evaluation and credit terms review for a new customer order in Vena Plc.

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PM – Nov 2014 – L2 – Q1 – Divisional Performance Measurement

Analyze transfer pricing impact on divisional performance and group profitability with tax implications for cross-border divisions.

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PM – May 2017 – L2 – SA – Q3 – Cost Management Strategies

Calculate relevant cost for engine production for Tadex and factors influencing component opportunity cost.

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PM – May 2023 – L2 – SA – Q3 – Decision Making Techniques

Evaluate the desirability of a contract for Product X by analyzing the labour, material, and overhead costs involved.

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PM – May 2022 – L2 – SA – Q1C – Costing Systems and Techniques

Explain the concepts

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PM – May 2019 – L2 – Q5 – Transfer Pricing

Profitability analysis for two divisions, including transfer pricing and external supplier impacts.

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PM – Nov 2018 – L2 – Q2a and Q2b – Transfer Pricing

Calculate divisional profits and analyze the group impact under different demand scenarios and alternative sourcing options.

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PM – Mar/Jul 2020 – L2 – Q5 – Transfer Pricing for Olascom Nigeria Limited

Calculation of the optimal transfer price for products between divisions at Olascom Nigeria Limited and evaluation of divisional performance.

You're reporting an error for "PM – Mar/Jul 2020 – L2 – Q5 – Transfer Pricing for Olascom Nigeria Limited"

Determine the optimal transfer pricing for consulting services between divisions within KayCee Ltd based on varying capacity scenarios.

MA – July 2023 – L2 – Q5 – Relevant cost and revenue, Decision making techniques

Calculate the minimum price for a special order using relevant costing principles, and discuss the relevance of fixed costs in decision-making scenarios.

You're reporting an error for "MA – July 2023 – L2 – Q5 – Relevant cost and revenue, Decision making techniques"

PM – Nov 2024 – L2 – Q5 – Risk Management

Financial evaluation and credit terms review for a new customer order in Vena Plc.

You're reporting an error for "PM – Nov 2024 – L2 – Q5 – Risk Management"

PM – Nov 2014 – L2 – Q1 – Divisional Performance Measurement

Analyze transfer pricing impact on divisional performance and group profitability with tax implications for cross-border divisions.

You're reporting an error for "PM – Nov 2014 – L2 – Q1 – Divisional Performance Measurement"

PM – May 2017 – L2 – SA – Q3 – Cost Management Strategies

Calculate relevant cost for engine production for Tadex and factors influencing component opportunity cost.

You're reporting an error for "PM – May 2017 – L2 – SA – Q3 – Cost Management Strategies"

PM – May 2023 – L2 – SA – Q3 – Decision Making Techniques

Evaluate the desirability of a contract for Product X by analyzing the labour, material, and overhead costs involved.

You're reporting an error for "PM – May 2023 – L2 – SA – Q3 – Decision Making Techniques"

PM – May 2022 – L2 – SA – Q1C – Costing Systems and Techniques

Explain the concepts

You're reporting an error for "PM – May 2022 – L2 – SA – Q1C – Costing Systems and Techniques"

PM – May 2019 – L2 – Q5 – Transfer Pricing

Profitability analysis for two divisions, including transfer pricing and external supplier impacts.

You're reporting an error for "PM – May 2019 – L2 – Q5 – Transfer Pricing"

PM – Nov 2018 – L2 – Q2a and Q2b – Transfer Pricing

Calculate divisional profits and analyze the group impact under different demand scenarios and alternative sourcing options.

You're reporting an error for "PM – Nov 2018 – L2 – Q2a and Q2b – Transfer Pricing"

PM – Mar/Jul 2020 – L2 – Q5 – Transfer Pricing for Olascom Nigeria Limited

Calculation of the optimal transfer price for products between divisions at Olascom Nigeria Limited and evaluation of divisional performance.

You're reporting an error for "PM – Mar/Jul 2020 – L2 – Q5 – Transfer Pricing for Olascom Nigeria Limited"

Determine the optimal transfer pricing for consulting services between divisions within KayCee Ltd based on varying capacity scenarios.

You're reporting an error for "Determine the optimal transfer pricing for consulting services between divisions within KayCee Ltd based on varying capacity scenarios."

MA – July 2023 – L2 – Q5 – Relevant cost and revenue, Decision making techniques

Calculate the minimum price for a special order using relevant costing principles, and discuss the relevance of fixed costs in decision-making scenarios.

You're reporting an error for "MA – July 2023 – L2 – Q5 – Relevant cost and revenue, Decision making techniques"

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