PT Kareem has 2 divisions, the Wheat Flour Division and the Instant Noodle Division. The Flour Division produces 5.000 kg of Flour and sells 2.000 kg of it to Instant Noodle Division. Wheat Flour is further processed by the Instant Noodle Division to produce 100.000 packs and sell them to customers at Rp2.250 per pack. At present, wheat flour is bought and sold outside the market at Rp 12.000 per kg. The following are the production costs per kg for the Flour Division and the production costs per pack for the Instant Noodle Division (excluding the cost of Wheat Flour): Wheat Flour Division Instant Noodle (Rp) Division (Rp) Direct Materials Cost 1.800 200 (For the Instant Noodle Division, Direct material costs component are additional DM cost beside cost of flour purchased from the Wheat Flour Division) Direct Labor Cost 2.400 300 Manufacturing Overhead Cost* 4.800 500 Production Cost per unit 9.000 1.000 Quantity of Production 5.000 kg 100.000 packs Manufacturing overhead costs in the Wheat Flour Division consist of 75% variable and 25% fixed. Manufacturing overhead costs in the Instant Noodle Division consist of 40% variable and 60% fixed. . Required: 1. Calculate the operating profit of each division with 2 alternative methods: 1. Market price method (12 points) 2. Cost method: 110% of full manufacturing costs (full manufacturing cost) (5 points) 2. Refer to requirement 1, suppose PT Kareem rewards each division manager with a bonus, calculated as 1% of division operating profit (if positive). Which transfer pricing method will each division manager prefer to use? In your opinion, what arguments would manager of Wheat Flour division make to support the transfer pricing method that he prefers? (3 points) 3. If PT Kareem decided that the Wheat Flour Division and the Instant Noodle Division could negotiate to determine the price of the transfer price and if they do internal sales, the Wheat Flour Division could reduce packaging costs by Rp500 per kg. Thus: 1. What are the minimum and maximum transfer prices if the Wheat Flour Division operates at full capacity? (2 points) 2. What are the minimum and maximum transfer prices if the Wheat Flour Division has an idle capacity of 2,000 kg. If the Instant Noodle Division offers to buy at Rp.8.000, will the Flour Division accept the offer? (3 points) PT Kareem has 2 divisions, the Wheat Flour Division and the Instant Noodle Division. The Flour Division produces 5.000 kg of Flour and sells 2.000 kg of it to Instant Noodle Division. Wheat Flour is further processed by the Instant Noodle Division to produce 100.000 packs and sell them to customers at Rp2.250 per pack. At present, wheat flour is bought and sold outside the market at Rp 12.000 per kg. The following are the production costs per kg for the Flour Division and the production costs per pack for the Instant Noodle Division (excluding the cost of Wheat Flour): Wheat Flour Division Instant Noodle (Rp) Division (Rp) Direct Materials Cost 1.800 200 (For the Instant Noodle Division, Direct material costs component are additional DM cost beside cost of flour purchased from the Wheat Flour Division) Direct Labor Cost 2.400 300 Manufacturing Overhead Cost* 4.800 500 Production Cost per unit 9.000 1.000 Quantity of Production 5.000 kg 100.000 packs Manufacturing overhead costs in the Wheat Flour Division consist of 75% variable and 25% fixed. Manufacturing overhead costs in the Instant Noodle Division consist of 40% variable and 60% fixed. . Required: 1. Calculate the operating profit of each division with 2 alternative methods: 1. Market price method (12 points) 2. Cost method: 110% of full manufacturing costs (full manufacturing cost) (5 points) 2. Refer to requirement 1, suppose PT Kareem rewards each division manager with a bonus, calculated as 1% of division operating profit (if positive). Which transfer pricing method will each division manager prefer to use? In your opinion, what arguments would manager of Wheat Flour division make to support the transfer pricing method that he prefers? (3 points) 3. If PT Kareem decided that the Wheat Flour Division and the Instant Noodle Division could negotiate to determine the price of the transfer price and if they do internal sales, the Wheat Flour Division could reduce packaging costs by Rp500 per kg. Thus: 1. What are the minimum and maximum transfer prices if the Wheat Flour Division operates at full capacity? (2 points) 2. What are the minimum and maximum transfer prices if the Wheat Flour Division has an idle capacity of 2,000 kg. If the Instant Noodle Division offers to buy at Rp.8.000, will the Flour Division accept the offer? (3 points)
