Topic: Transfer Pricing

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  • 10 Marks

MA – Nov 2024 – L2 – Q1a – Transfer Pricing

Explanation of three reasons why Kako PLC determines transfer pricing centrally.

Kako PLC is a multinational company with production divisions trading in many countries across the globe. Trade takes place between a number of the divisions in different countries, with intermediate products being transferred between them. Where a transfer takes place between divisions trading in different countries, it is the policy of the board of the company to determine centrally the right transfer price without reference to the managers in the division.

Required:

i) Explain THREE possible reasons for Kako PLC to determine transfer prices of goods from the head office.

ii) Explain TWO criticisms of the central determination of transfer pricing.

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  • 15 Marks

ATAX – May 2017 – L3 – Q5 – Transfer Pricing

Explain the significance of transfer pricing, its regulation, and methods.

The dwindling oil revenue in recent times has constrained the earning capacity of the Nigerian government. This situation accelerated the slide in the nation’s economy into recession in 2016. There has been a lot of arguments as to which regime’s actions or inactions brought about this economic malaise. Some experts argue that Nigeria has good tax laws, but successive governments displayed a lack of political will to implement them. They posit that the lack of implementation has caused the nation’s Internally Generated Revenue (IGR) to nosedive.

As part of various recommendations by these experts, coupled with the compelling need to shore up the Internally Generated Revenue, the Federal Inland Revenue Service (FIRS) has created the Transfer Pricing Division located in the FIRS Building at Ikoyi, Lagos. To give teeth to its mandate, the Division has been writing multinationals and groups of companies to file returns with it, in respect of their transfer pricing activities.

MGBORIE GROUP LIMITED recently received one of such letters from the FIRS, which startled the Chairman/Chief Executive who is already sensing rough times with the FIRS.

As the company’s tax consultant, the letter was forwarded to you for further explanations.

You are required to state:
a. The significance of Transfer Pricing. (2 Marks)
b. TWO objectives of the Income Tax (Transfer Pricing) Regulation Act of 2012. (2 Marks)
c. Contents of the Transfer Pricing Disclosure and Submission Forms to the FIRS. (5 Marks)
d. THREE Transfer Pricing Methods. (6 Marks)

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  • 15 Marks

ATAX – May 2019 – L3 – Q6 – Transfer Pricing

Outline key aspects of transfer pricing regulations in Nigeria, including objectives, key concepts, and methods.

The need for monitoring and controlling the operations of multi-national enterprises (MNEs) and their local subsidiaries or associate companies around the world has necessitated special interest in various governments putting in place mechanisms for the treatment of transfer pricing. Although transfer pricing is not new in Nigeria, the law regulating it, the Income Tax (Transfer Pricing) Regulation Act, was enacted in August 2012. It specifies that “every taxpayer” is expected to develop a transfer pricing policy in regard to transfer pricing and control transactions, as well as treatment of transactions of permanent establishments (PE) and dispute resolutions.

You have been invited by the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA) to present a paper at a workshop on transfer pricing regulations in Nigeria. The primary objective of the workshop is to provide the participants, both local and foreign stakeholders in the Nigerian business environment, necessary information on transfer pricing issues in Nigeria.

You are required to outline relevant points to address the following issues:

a. Objectives of application of transfer pricing regulation in Nigeria (3 Marks)
b. The concepts of:
i. Connected taxable persons (3 Marks)
ii. Arm’s length principle (3 Marks)
c. Description of three transfer pricing methods (6 Marks)

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  • 15 Marks

AT – Nov 2014 – L3 – SC – Q5 – Transfer Pricing

Explain transfer pricing objectives, treatment of permanent establishments, and disclosure requirements under FIRS.

You are the Tax Manager of Forum Tax Associates and recently represented your firm at a Workshop organised by the Federal Inland Revenue Service (FIRS), Western Zone, on Transfer Pricing Regulations in Nigeria.

The Workshop was to create awareness on the filing requirements and compliance with the provisions of “The Income Tax (Transfer Pricing) Regulations 2012.”

The Workshop, which was held on the 20th Floor of the Nigeria Stock Exchange building, was fully attended by Company Auditors, Tax Practitioners, Stock Brokers, Bankers, and other Stakeholders.

From the notes you took at the Workshop, you presented a report to the Managing Partner, Forum Tax Associates, on Wednesday, 3 September 2014. The Managing Partner thanked you for a good job and highlighted some key areas of the regulations that will serve as a guide to the staff of the firm.

Required:
Prepare a technical briefing for the staff explaining the following key areas noted by the Managing Partner:
a) Objectives of the application of Transfer Pricing Regulations. (6 Marks)
b) Treatment of Permanent Establishment. (2 Marks)
c) Contents of a Transfer Pricing Disclosure to be submitted by Companies to the FIRS. (7 Marks)

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  • 20 Marks

ATAX – May 2023 – L3 – Q3 – Transfer Pricing

Explain transfer pricing compliance, declaration, and disclosure requirements along with arm's length comparability factors.

Transfer pricing has become a topical fiscal policy issue globally due to the need for governments to prevent tax evasion and economic double taxation. Developing countries are encouraged to establish regulations to protect their tax bases while maintaining investor confidence.

NADA Incorporated, a multinational company headquartered in Quebec, Canada, plans to establish a textile company in northern Nigeria. While reviewing the Nigerian Income Tax (Transfer Pricing) Regulations 2018, the board of directors identified uncertainties around transfer pricing documentation and arm’s length comparability factors.

You are engaged as the company’s Tax Consultant to clarify these issues.

Required:

Send a report to the Managing Director of PROMOT Link, explaining:

(a) Transfer pricing compliance report (3 Marks)
(b) Transfer pricing declaration form to be submitted to the Federal Inland Revenue Service (FIRS) (6 Marks)
(c) Transfer pricing disclosure form to be submitted to the FIRS (6 Marks)
(d) Arm’s length comparability factors in transfer pricing (5 Marks)

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  • 8 Marks

ATAX – Nov 2018 – L3 – Q4c – Transfer Pricing

Advisory on maintaining the arm's length principle in inter-company transactions for Abbey Limited.

(c) You are the tax controller of Abbey Limited, the holding company of a group of companies involved in various businesses including: trading, manufacturing, distribution, and packaging. The companies from time to time supply goods and services to each other at pre-determined prices.

You are required to:
Advise the board of Abbey Limited on the factors to be considered when the entities transact business amongst themselves to ensure that the arm’s length principle is upheld.
(8 Marks)

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  • 30 Marks

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.

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)

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  • 15 Marks

PM – May 2017 – L2 – SA – Q7 – Transfer Pricing

Discuss transfer pricing and recommend pricing structure for internal divisions of Adebel Nigeria Limited.

  1. Adebel Nigeria Limited manufactures motorcycles, operating through two divisions: the assembling division (Division A) and the engine division (Division E). Division E supplies engines to both Division A and external customers. The company’s policy requires that Division E prioritize internal sales to Division A over external sales, while Division A is mandated to purchase exclusively from Division E. However, this policy, along with the transfer price set by Division E, is under review.

    Division Details:

    • Division A anticipates a need for 45,000 engines in the coming year, with an external supplier price of N80,000 per engine.
    • Division E can produce up to 70,000 engines per year, with the following budgeted details:
      • Budgeted sales volume: 70,000 units
      • External selling price: N85,000 per engine
      • Variable cost per unit for external sales: N77,000
      • Variable cost per unit for internal sales to Division A: N3,000 less due to distribution and packaging savings.
      • Maximum external demand: 35,000 units per year.

Requirements:

a. Recommend the transfer price(s) for internal sales, considering the conditions. (5 marks)

b. Using calculations, advise the number of engines Division E should supply to Division A to maximize group profits, assuming a flexible policy. (5 marks)

c. Discuss two performance measures suitable for evaluating divisional performance of autonomous divisions operating as investment centers. (5 marks)

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  • 15 Marks

PM – May 2019 – L2 – Q5 – Transfer Pricing

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

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.

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  • 30 Marks

PM – May 2018 – L2 – Q1 – Divisional Performance Measurement and Transfer Pricing

Differentiate responsibility centres, explain divisional structure, recommend transfer prices, and consider qualitative factors.

DASET DRINKS NIGERIA PLC.
(30 MARKS)
Daset Drinks Nigeria Plc. has been operating in the Nigerian food and beverages
industry as an entity with three distinct factories across the country. One of the
factories bottles soft drink while the other two produce bottles and crown corks for
the soft drink factory.
The company has recently been experiencing problems with its performance
evaluation system across the three factories. Each factory manager is of the
opinion that his factory is the one contributing the most to the overall performance
of the company.
In a recent management retreat, the guest speaker, a performance management
expert, emphasised the need to develop Key Performance Indicators (KPI) for each
of the factories and departments in the company. According to him, this will
enhance performance evaluation of all the managers in the company and will also
make performance management easier. He suggested that the company should
adopt a divisional structure whereby each of the factories will become an
autonomous division with responsibilities for investment, revenues, profits and
costs.
At the last Executive Management meeting, after the retreat, the company‟s top
management decided to adopt the recommendations of the guest speaker. The top
management agreed transfer prices acceptable to each of the divisional managers
and also the needs to decide whether the two factories manufacturing bottles and
corks cocks could sell to external markets.
The top management has mandated you, as the company‟s management
accountant, to supply necessary data that will assist them in taking appropriate
decisions.

Financial data collected about the company‟s operations are as follows:
The costs and selling prices of the divisions are:

This includes costs of bottle and crown cork. To produce one bottle of soft drink
requires one bottle and one crown cork.
The bottling division has the choice to buy its bottle and crown cork requirements
from the external market.
The variable costs of production for external sales and internal transfers are the
same and bottles and crown corks are being transferred to the bottling division at
these costs.
For brand protection, the soft drink factory is not willing to buy bottles and crown
corks from any external supplier.
Required:
a. Differentiate among an investment centre, a profit centre, a revenue centre
and a cost centre, in a divisional organisation giving one example of each.
(8 Marks)

b. Explain a divisional structure, stating the problems associated with this type
of structure in an organisation. (8 Marks)

c. Advise the top management on the transfer prices that will maximise the
company‟s profit and be acceptable to the factory managers.
(10 Marks)
d. Discuss TWO qualitative factors that the top management needs to consider
in taking these decisions. (4 Marks)

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  • 10 Marks

MA – Nov 2024 – L2 – Q1a – Transfer Pricing

Explanation of three reasons why Kako PLC determines transfer pricing centrally.

Kako PLC is a multinational company with production divisions trading in many countries across the globe. Trade takes place between a number of the divisions in different countries, with intermediate products being transferred between them. Where a transfer takes place between divisions trading in different countries, it is the policy of the board of the company to determine centrally the right transfer price without reference to the managers in the division.

Required:

i) Explain THREE possible reasons for Kako PLC to determine transfer prices of goods from the head office.

ii) Explain TWO criticisms of the central determination of transfer pricing.

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  • 15 Marks

ATAX – May 2017 – L3 – Q5 – Transfer Pricing

Explain the significance of transfer pricing, its regulation, and methods.

The dwindling oil revenue in recent times has constrained the earning capacity of the Nigerian government. This situation accelerated the slide in the nation’s economy into recession in 2016. There has been a lot of arguments as to which regime’s actions or inactions brought about this economic malaise. Some experts argue that Nigeria has good tax laws, but successive governments displayed a lack of political will to implement them. They posit that the lack of implementation has caused the nation’s Internally Generated Revenue (IGR) to nosedive.

As part of various recommendations by these experts, coupled with the compelling need to shore up the Internally Generated Revenue, the Federal Inland Revenue Service (FIRS) has created the Transfer Pricing Division located in the FIRS Building at Ikoyi, Lagos. To give teeth to its mandate, the Division has been writing multinationals and groups of companies to file returns with it, in respect of their transfer pricing activities.

MGBORIE GROUP LIMITED recently received one of such letters from the FIRS, which startled the Chairman/Chief Executive who is already sensing rough times with the FIRS.

As the company’s tax consultant, the letter was forwarded to you for further explanations.

You are required to state:
a. The significance of Transfer Pricing. (2 Marks)
b. TWO objectives of the Income Tax (Transfer Pricing) Regulation Act of 2012. (2 Marks)
c. Contents of the Transfer Pricing Disclosure and Submission Forms to the FIRS. (5 Marks)
d. THREE Transfer Pricing Methods. (6 Marks)

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  • 15 Marks

ATAX – May 2019 – L3 – Q6 – Transfer Pricing

Outline key aspects of transfer pricing regulations in Nigeria, including objectives, key concepts, and methods.

The need for monitoring and controlling the operations of multi-national enterprises (MNEs) and their local subsidiaries or associate companies around the world has necessitated special interest in various governments putting in place mechanisms for the treatment of transfer pricing. Although transfer pricing is not new in Nigeria, the law regulating it, the Income Tax (Transfer Pricing) Regulation Act, was enacted in August 2012. It specifies that “every taxpayer” is expected to develop a transfer pricing policy in regard to transfer pricing and control transactions, as well as treatment of transactions of permanent establishments (PE) and dispute resolutions.

You have been invited by the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA) to present a paper at a workshop on transfer pricing regulations in Nigeria. The primary objective of the workshop is to provide the participants, both local and foreign stakeholders in the Nigerian business environment, necessary information on transfer pricing issues in Nigeria.

You are required to outline relevant points to address the following issues:

a. Objectives of application of transfer pricing regulation in Nigeria (3 Marks)
b. The concepts of:
i. Connected taxable persons (3 Marks)
ii. Arm’s length principle (3 Marks)
c. Description of three transfer pricing methods (6 Marks)

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  • 15 Marks

AT – Nov 2014 – L3 – SC – Q5 – Transfer Pricing

Explain transfer pricing objectives, treatment of permanent establishments, and disclosure requirements under FIRS.

You are the Tax Manager of Forum Tax Associates and recently represented your firm at a Workshop organised by the Federal Inland Revenue Service (FIRS), Western Zone, on Transfer Pricing Regulations in Nigeria.

The Workshop was to create awareness on the filing requirements and compliance with the provisions of “The Income Tax (Transfer Pricing) Regulations 2012.”

The Workshop, which was held on the 20th Floor of the Nigeria Stock Exchange building, was fully attended by Company Auditors, Tax Practitioners, Stock Brokers, Bankers, and other Stakeholders.

From the notes you took at the Workshop, you presented a report to the Managing Partner, Forum Tax Associates, on Wednesday, 3 September 2014. The Managing Partner thanked you for a good job and highlighted some key areas of the regulations that will serve as a guide to the staff of the firm.

Required:
Prepare a technical briefing for the staff explaining the following key areas noted by the Managing Partner:
a) Objectives of the application of Transfer Pricing Regulations. (6 Marks)
b) Treatment of Permanent Establishment. (2 Marks)
c) Contents of a Transfer Pricing Disclosure to be submitted by Companies to the FIRS. (7 Marks)

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  • 20 Marks

ATAX – May 2023 – L3 – Q3 – Transfer Pricing

Explain transfer pricing compliance, declaration, and disclosure requirements along with arm's length comparability factors.

Transfer pricing has become a topical fiscal policy issue globally due to the need for governments to prevent tax evasion and economic double taxation. Developing countries are encouraged to establish regulations to protect their tax bases while maintaining investor confidence.

NADA Incorporated, a multinational company headquartered in Quebec, Canada, plans to establish a textile company in northern Nigeria. While reviewing the Nigerian Income Tax (Transfer Pricing) Regulations 2018, the board of directors identified uncertainties around transfer pricing documentation and arm’s length comparability factors.

You are engaged as the company’s Tax Consultant to clarify these issues.

Required:

Send a report to the Managing Director of PROMOT Link, explaining:

(a) Transfer pricing compliance report (3 Marks)
(b) Transfer pricing declaration form to be submitted to the Federal Inland Revenue Service (FIRS) (6 Marks)
(c) Transfer pricing disclosure form to be submitted to the FIRS (6 Marks)
(d) Arm’s length comparability factors in transfer pricing (5 Marks)

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  • 8 Marks

ATAX – Nov 2018 – L3 – Q4c – Transfer Pricing

Advisory on maintaining the arm's length principle in inter-company transactions for Abbey Limited.

(c) You are the tax controller of Abbey Limited, the holding company of a group of companies involved in various businesses including: trading, manufacturing, distribution, and packaging. The companies from time to time supply goods and services to each other at pre-determined prices.

You are required to:
Advise the board of Abbey Limited on the factors to be considered when the entities transact business amongst themselves to ensure that the arm’s length principle is upheld.
(8 Marks)

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  • 30 Marks

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.

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)

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  • 15 Marks

PM – May 2017 – L2 – SA – Q7 – Transfer Pricing

Discuss transfer pricing and recommend pricing structure for internal divisions of Adebel Nigeria Limited.

  1. Adebel Nigeria Limited manufactures motorcycles, operating through two divisions: the assembling division (Division A) and the engine division (Division E). Division E supplies engines to both Division A and external customers. The company’s policy requires that Division E prioritize internal sales to Division A over external sales, while Division A is mandated to purchase exclusively from Division E. However, this policy, along with the transfer price set by Division E, is under review.

    Division Details:

    • Division A anticipates a need for 45,000 engines in the coming year, with an external supplier price of N80,000 per engine.
    • Division E can produce up to 70,000 engines per year, with the following budgeted details:
      • Budgeted sales volume: 70,000 units
      • External selling price: N85,000 per engine
      • Variable cost per unit for external sales: N77,000
      • Variable cost per unit for internal sales to Division A: N3,000 less due to distribution and packaging savings.
      • Maximum external demand: 35,000 units per year.

Requirements:

a. Recommend the transfer price(s) for internal sales, considering the conditions. (5 marks)

b. Using calculations, advise the number of engines Division E should supply to Division A to maximize group profits, assuming a flexible policy. (5 marks)

c. Discuss two performance measures suitable for evaluating divisional performance of autonomous divisions operating as investment centers. (5 marks)

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  • 15 Marks

PM – May 2019 – L2 – Q5 – Transfer Pricing

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

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.

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  • 30 Marks

PM – May 2018 – L2 – Q1 – Divisional Performance Measurement and Transfer Pricing

Differentiate responsibility centres, explain divisional structure, recommend transfer prices, and consider qualitative factors.

DASET DRINKS NIGERIA PLC.
(30 MARKS)
Daset Drinks Nigeria Plc. has been operating in the Nigerian food and beverages
industry as an entity with three distinct factories across the country. One of the
factories bottles soft drink while the other two produce bottles and crown corks for
the soft drink factory.
The company has recently been experiencing problems with its performance
evaluation system across the three factories. Each factory manager is of the
opinion that his factory is the one contributing the most to the overall performance
of the company.
In a recent management retreat, the guest speaker, a performance management
expert, emphasised the need to develop Key Performance Indicators (KPI) for each
of the factories and departments in the company. According to him, this will
enhance performance evaluation of all the managers in the company and will also
make performance management easier. He suggested that the company should
adopt a divisional structure whereby each of the factories will become an
autonomous division with responsibilities for investment, revenues, profits and
costs.
At the last Executive Management meeting, after the retreat, the company‟s top
management decided to adopt the recommendations of the guest speaker. The top
management agreed transfer prices acceptable to each of the divisional managers
and also the needs to decide whether the two factories manufacturing bottles and
corks cocks could sell to external markets.
The top management has mandated you, as the company‟s management
accountant, to supply necessary data that will assist them in taking appropriate
decisions.

Financial data collected about the company‟s operations are as follows:
The costs and selling prices of the divisions are:

This includes costs of bottle and crown cork. To produce one bottle of soft drink
requires one bottle and one crown cork.
The bottling division has the choice to buy its bottle and crown cork requirements
from the external market.
The variable costs of production for external sales and internal transfers are the
same and bottles and crown corks are being transferred to the bottling division at
these costs.
For brand protection, the soft drink factory is not willing to buy bottles and crown
corks from any external supplier.
Required:
a. Differentiate among an investment centre, a profit centre, a revenue centre
and a cost centre, in a divisional organisation giving one example of each.
(8 Marks)

b. Explain a divisional structure, stating the problems associated with this type
of structure in an organisation. (8 Marks)

c. Advise the top management on the transfer prices that will maximise the
company‟s profit and be acceptable to the factory managers.
(10 Marks)
d. Discuss TWO qualitative factors that the top management needs to consider
in taking these decisions. (4 Marks)

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