IIlulul

TRANSFER PRICING TUTORIAL The following scenario relates to three requirements. The Portable Garage Co (PGCI is a company specialising in the manufacture and sale of a range of products for motorists. it is split into two divisions: the battery division (Division B) and the adaptor division (Division A). Division B sells one product - portable battery chargers for motorists which can be attached to a cads own battery and used to start up the engine when the car's own battery fails Division A sells adaptors Which are used by customers to Charge mobile devices and laptops bv attaching them to the car's internal pcmer qurce. Recently, Division d has upgraded its portable battery so it can also be used to rapidly charge mobile devices and laptops. The mobile device or laptop must be attached to the battery using a special adaptor which is supplied to the Customer With the battery Division g currently buys the adaptors from Division A, Which also sells them externally to other companies. The following data is available for both divisions: ion B Iling price for each portable battery, including adaptor OStS battery: Adaptor from Division A Other materials from external suppliers Labour costs nual fixed overheads nual production and sales of portable batteries (units) ximum annual market demand for portable batteries (units) ion A Iling price per adaptor to Division g Iling price per adaptor to external customers OStS per adaptor: Materials Labour costs nual fixed o.'erheads urrent annual production capacity and sales of adaptors both internal and rnal sales (units) annual external demand for adaptors (units) NS180 N513 NS45 NS3S NS5460 OOO NS13 NSIS N$2 200 OCO In addition to the materials and labour costs above, Division A incurs a variable cost of NSI per adaptor for all adaptors it sells externally. Currently, Head Office's purchasing policy only allow's Division B to purchase the adaptors from Division A but Division A has refused to sell Division g anv more than the current level of adaptors it supplies to it. The manager of Division B is unhappy. He has a special industry contact who he could buy the adaptors from at exactly the same price charged Division A if he were given the autonomy to purchase from outside the group. After discussions With both Of the divisional managers and to ensure that the managers are not demotivated, Head Office has now agreed to change the purchasing policy to allow Division B to buy externally, provided that it optimises the profits of the group as a Whole. Required: Under the current transfer pricing system, prepare a profit statement showing the profit for each of the divisions and for The Portable Garage co (PGC) as a Whole. Your and Should be split into external sales and inter-divisionaj transfers, where approprrate,