Question 12: TRANSFER PRICING

Exercise 2 from Week 9 Tutorial is an excellent example of transfer pricing method variations. This is repeated here for your consideration. Solutions have been provided on Moodle under Week 9 tutorial solutions.

Exercise 2 - transfer pricing

Use the following information to answer questions a) - e) below:

Capacity of supplying division

43,750

Market sell price (per tonne)

$1,340

Cost of production:

Variable cost (mfg)

Variable labour

$170

Variable material

$340

Variable overhead

$20

Total variable mfg costs

$530

Fixed cost (mfg)

$300

Total manufacturing costs

$830

Other costs:

Sales and admin costs

$107

(applies to all external sales)

a)Calculate margin (profit) on external sales using both variable AND absorption costing per unit (Note contribution margin applies if variable cost is used and profit is used if absorption costing is used)

Margin/Profit on external sales:

At VC (GTPR)

$703.00

At Absorption cost (Cost plus)

$403.00

Using the general transfer pricing rule (GTPR) complete the following:

b)If the external demand was 27,000 units and the internal division required 17,750 units, what would be the total transfer price (and calculate average price per unit) to the internal division.

ANSWER: As there is insufficient capacity to supply both internal and external needs, there would be opportunity cost charged on the 1,000 units for which the supplying division missed out on external sales by supplying internally.

The cost would be 17,750 x $530 (Variable cost) PLUS 1,000 x

$703 (opportunity cost of lost sales margin) = $10,110,500 with an average cost of $569.61 per unit (tonne).

See calculation below:

Demonstration of two scenarios (with and without spare capacity)

GTPR WITHOUT SPARE CAPACITY

Total capacity

43,750

Units sold externally

27,000

Units required internally

17,750

Limited quantity to external customers (Capacity constraint)

26,000

Limited quantity to internal customers Units transferred with opp cost

1,000

Additional cost (VC) per unit

$530

Total additional cost of production

$9,407,500

Opportunity cost per unit (note that Selling costs deducted)

$703

Opportunity cost on (1000) units

$703,000

Total transfer cost per period

$10,110,500

Average Transfer price per unit

$569.61

Using the quantities shown in question

d), calculate the TOTAL contribution margin for the supplying division under both of the following circumstances:

d)a.Calculate the total contribution margin if the company limited supply to the suppliers (normal operations) so it could supply all of the internal division's requirements first.

d)b.The supplying division decided to LIMIT supply to the buying division so it could supply all of its external customer's demand first (i.e. only surplus quantity would be supplied so NO additional opportunity cost would be charged

c)What can be determined from the results of your answers to both parts of question c)?

I need the answer of da, db ,and c ...other parts is already solved just need the last part.