transfer pricing

MA – L2 – Q65 – Transfer Pricing

Prepare profit statements for Kumasi Construction Materials Ltd at 80% and 100% capacity with transfer prices of GH₵200 and GH₵180.

Question

Kumasi Construction Materials Ltd is organised into two trading divisions. Division A makes materials that are used to manufacture special bricks. It transfers some of these materials to Division B and sells some of the materials externally to other brick manufacturers. Division B makes special bricks from the materials and sells them to traders in building materials.

The production capacity of Division A is 2,000 tonnes per month. At present, sales are limited to 1,000 tonnes to external customers and 600 tonnes to Division B.

The transfer price was agreed at GH₵200 per tonne in line with the external sales trade price at 1st July which was the beginning of the budget year. From 1st December, however, strong competition in the market has reduced the market price for the materials to GH₵180 per tonne.

The manager of Division B is now saying that the transfer price for the materials from Division A should be the same as for external customers. The manager of Division A rejects this argument on the basis that the original budget established the transfer price for the entire financial year.

From each tonne of materials, Division B produces 1,000 bricks, which it sells at GH₵0.40 per brick. It would sell a further 400,000 bricks if the price were reduced to GH₵0.32 per brick.

Other data relevant are given below:

Division A	Division B
GH₵	GH₵
Variable cost per tonne	70
Fixed cost per month	100,000

The variable costs of Division B exclude the transfer price of materials from Division A.

Required:
(a) Prepare estimated profit statements for the month of December for each division and for Kumasi Construction Materials Ltd as a whole, based on transfer prices of GH₵200 per tonne and of GH₵180 per tonne, when producing at
(i) 80% capacity
(ii) 100% capacity, on the assumption that Division B reduces the selling price to GH₵0.32.

(b) Comment on the effect that might result from a change in the transfer price from GH₵200 to GH₵180.

(c) Suggest an alternative transfer price that would provide an incentive for Division B to reduce the selling price and increase sales by 400,000 bricks a month.

Answer

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Tags: Capacity Utilization, Divisional performance, Internal Transfers, Profit Statements, transfer pricing
Level: Level 2

Topic: Divisional performance, Transfer pricing

MA – L2 – Q64 – Transfer Pricing

Evaluate transfer pricing objectives and calculate company contribution for Keta Fitness Ltd's divisions.

Question

KETA FITNESS LTD
(a) Objectives of Transfer pricing include the following:
(i) Goal congruence
(ii) Performance evaluation
(iii) Divisional authority
(iv) Tax minimisation
(v) Motivation
(b) The company’s contribution as a whole

	DIVISION A	DIVISION B	COMPANY
Selling price	GH₵ 20,000	GH₵ 30,000	GH₵ 30,000
Incremental Cost (A)	(12,000)	(20,000)	(12,000)
Incremental Cost (B)	–	(15,000)	(15,000)
Contribution	8,000	(5,000)	3,000

(i) Should Division A transfer to Division B or sell as an intermediate product?
(ii) If there is excess capacity of 200 units, what would be the total contribution and the range of transfer prices for the excess capacity?

Answer

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Tags: Contribution Analysis, Divisional performance, goal congruence, Internal Transfers, Motivation, Performance Evaluation, transfer pricing
Level: Level 2

Topic: Transfer pricing

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?

Answer

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Tags: Divisional performance, Full capacity, Opportunity cost, transfer pricing
Level: Level 2

Topic: Transfer pricing

MA – L2 – Q54 – Transfer pricing

Calculate profits for Zora Shoes Ltd's departments under different pricing methods, evaluate an outsourcing offer, and explain transfer pricing principles.

Question

Zora Shoes Ltd sells 5,000 pairs of shoes each month through its Production/Sales department. 25% of the shoes (by number) sold require repairs which are carried out by the company’s Repairs department. The Production/Sales department collects an additional GH¢5 for each pair of shoe requiring repairs as an anticipated repair charge when the shoes are sold to customers. The following additional information is available:

	GH¢
Material	2.50
Labour	1.5 per Labour hour
Variable Overheads	0.5 per Labour hour
Fixed Overheads	1.15 per Labour hour

Each repair takes 2 labour hours and the Repairs department processes 1,250 repairs each month (5,000 pairs × 25%). The Production/Sales department sells each pair of shoe for GH¢22.

Required:
(i) Calculate the individual profits of the Production/Sales department, Repairs department and Zora Ventures if repairs are done by the repairs department of Zora Ventures at either full cost plus 20% margin on sales or at marginal cost. (8 marks)
(ii) Lee Shoe Repairs has offered to repair each pair of shoe for Zora Ventures at GH¢10.00, a price which is cheaper than what the repairs department is offering. Should Zora Ventures accept this offer? (5 marks)
(iii) Identify THREE other factors Zora Ventures should consider in finalizing the decision in (ii) above? (3 marks)
(iv) Explain TWO principles of a good transfer pricing method.

Answer

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Tags: Cost-plus pricing, goal congruence, Marginal Costing, outsourcing decision, subunit autonomy, transfer pricing
Level: Level 2

Topic: Transfer pricing

Tag (SQ): transfer pricing

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MA – L2 – Q65 – Transfer Pricing

Prepare profit statements for Kumasi Construction Materials Ltd at 80% and 100% capacity with transfer prices of GH₵200 and GH₵180.

MA – L2 – Q64 – Transfer Pricing

Evaluate transfer pricing objectives and calculate company contribution for Keta Fitness Ltd's divisions.

MA – L2 – Q63 – Transfer pricing

Define an optimal transfer price for Keta Shelving Limited.

MA – L2 – Q54 – Transfer pricing

Calculate profits for Zora Shoes Ltd's departments under different pricing methods, evaluate an outsourcing offer, and explain transfer pricing principles.

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MA – L2 – Q65 – Transfer Pricing

Prepare profit statements for Kumasi Construction Materials Ltd at 80% and 100% capacity with transfer prices of GH₵200 and GH₵180.

You're reporting an error for "MA – L2 – Q65 – Transfer Pricing"

MA – L2 – Q64 – Transfer Pricing

Evaluate transfer pricing objectives and calculate company contribution for Keta Fitness Ltd's divisions.

You're reporting an error for "MA – L2 – Q64 – Transfer Pricing"

MA – L2 – Q63 – Transfer pricing

Define an optimal transfer price for Keta Shelving Limited.

You're reporting an error for "MA – L2 – Q63 – Transfer pricing"

MA – L2 – Q54 – Transfer pricing

Calculate profits for Zora Shoes Ltd's departments under different pricing methods, evaluate an outsourcing offer, and explain transfer pricing principles.

You're reporting an error for "MA – L2 – Q54 – Transfer pricing"

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