- 15 Marks
MA – L2 – Q63 – Transfer pricing
Define an optimal transfer price for Keta Shelving Limited.
Question
(A) Keta Shelving Limited, a company operating near Mount Adaklu, has two operating divisions, X and Y, that are treated as profit centres for the purpose of performance reporting.
Division X makes two products, Product A and Product B. Product A is sold to external customers for GH₵62 per unit. Product B is a part-finished item that is sold only to Division Y.
Division Y can obtain the part-finished item from either Division X or from an external supplier. The external supplier charges a price of GH₵55 per unit.
The production capacity of Division X is measured in total units of output, Products A and B. Each unit requires the same direct labour time. The costs of production in Division X are as follows:
| Product A | Product B | |
|---|---|---|
| GH₵ | GH₵ | |
| Variable cost | 46 | 48 |
| Fixed cost | 19 | 19 |
| Full cost | 65 | 67 |
Required:
(a) What is an optimal transfer price?
(b) What would be the optimal transfer price for Product B if there is spare production capacity in Division X?
(c) What would be the optimal transfer price for Product B if Division X is operating at full capacity due to a limited availability of direct labour, and there is unsatisfied external demand for Product A?
Find Related Questions by Tags, levels, etc.
- Tags: Divisional performance, Full capacity, Opportunity cost, transfer pricing
- Level: Level 2
- Topic: Transfer pricing
