Problem 13.11 (Overall profitability-transfer price as applicable to outside customers and transfer price based on total cost less selling and distribution expenses). A Company has two Divisions has two Divisions viz. LD and KD. LD operates at full capacity and KD operates at 50% capacity. LD produces two products, LX and LY using the same labour force for each product. The direct wage rate per production hour is Rs. 5. During the next year, its budgeted capacity of 42.000 direct labour hours involves a commitment to sell 6,000 kg. of LY. The balance capacity will be used for the production olLX. Cost data are: LX LY Rs./Kg Rs./kg Direct Materials 36 28 Direct Wages 30 20 The Company's overheads amount to Rs. 7,56,000 per annum relating or LX and LY in proportion to other direct wages. At full capacity Rs. 4,20,000 of this overhead is variable. LD prices its products with 50% mark-up on its total costs. KD wishes to buy 2,000 kgs. of LX from LD for being processed into KX to be sold at Rs. 300 per kg. The processing materials and wage cost are Rs. 30 per kg. and the variable overheads amount to Rs. 4 per kg. The fixed costs amount to Rs. 1,00,000 per annum. Prepare a report showing the profitability of LD and KD and the Company as a whole for each of the following transfer price methods: (i) LD transfers LX at a price applicable to outside customers on the basis of total cost. (ii) LD transfers LX at a price based on total costs less credit for selling and distribution expenses of Rs. 4 per kg. which will not be incurred in respect of the sale of KD. (iii) LD transfers LX at a price based on marginal cost as reduce by Rs. 4 per g. of selling and distribution expenses. (iv) LD manufactures the quantity of LX required by KD by employing overtime payable at double the normal wage rate and transfers at marginal cot less Rs. 4 per kg. being selling and distribution costs not incurred in respect of sale to KD. LD sells the entire regular production to outside customers at the usual price