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N 62% 2:49 PM MCS assign. (Ismail Sir).p... Q 248 Part One The Management Control Environment Transfer Pricing Problems I. Division A of Lambda Company manufactures Product X, which is sold to Division B as component of Product Y. Product Y is sold to Division C, which uses it as a component in Product Z. Product Z is sold to customers outside of the company. The intracompany pricing rule is that products are transferred between divisions at standard cost plus a 10 percentre. turn on inventories and fixed assets. From the information provided below, calculate the transfer price for Products X and Y and the standard cost of Product Z. Standard Cost per Unit Product X Product Y Product Z Andawards Material purchased outside . . . $ 2.00 3.00 Word:go . Direct labor . . . . . .. 1:00 $ 1.00 1.00 Dordor 2.00 Variable overhead 1.00 1.00 2.00 Fixed overhead per unit. . . . . . 3.00 4.00 1.00 Standard volume. . 10,000 10,000 10,000 Inventories (average). $70,000 $15,000 $30,000 Fixed assets (net) . . . . 30,000 45,000 16,000 2. Assume the same facts as stated in Problem 1, except that the transfer price rule is as fol- lows: Goods are transferred among divisions at the standard variable cost per unit trans- ferred plus a monthly charge. This charge is equal to the fixed costs assigned to the product plus a 10 percent return on the average inventories and fixed assets assignable to the prod- uct. Calculate the transfer price for Products X and Y and calculate the unit standard cost for Products Y and Z. 3. The present selling price for Product Z is $28.00. Listed below is a series of possible price re- ductions by competition and the probable impact of these reductions on the volume of sales if Division C does not also reduce its price. . Possible competitive price: $27.00; $26.00; $25.00; $23.00; $22.00. . Sales volume if price of Product Z is maintained at $28.00: 9,000; 7,000; 5,000; 2,000; 0- . Sales volume if price of Product Z is reduced to competitive levels: 10,000; 10,000; 10,000; 10,000; 10,000. Questions a. With transfer price calculated in Problem 1, is Division C better advised to maintain its price at $28.00 or to follow competition in each of the instances above? b. With the transfer prices calculated in Problem 2, is Division C better advised to above? maintain its present price at $28.00 or to follow competition in each of the instances This case was prepared by Professors John Dearden and Robert N. Anthony. Scanned with CamScanner Chapter 6 Transfer Pricing 249 and to the best acone O