- 16 Marks
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)
Find Related Questions by Tags, levels, etc.
- Tags: Divisional Profit, External Supplier, Opportunity Cost, Transfer Pricing
- Level: Level 2
- Topic: Divisional Performance Measurement, Transfer Pricing
- Series: NOV 2018