Question 6

Manuco company has been offered supplies of special ingredient Z at a transfer price of GHS15 per kg by Helpco company, which is part of the same group of companies. Helpco produces and sells special ingredient Z to costumers external to the group at GHS15 per kg. Helpco basis its transfer price on on full cost plus 25% profit markup.

The full cost has been estimated at 75% variable and 25% fixed. Internal transfer to Manuco would enable GHS1.50 per kg of variable packing cost to be avoided.

Required:

Discuss the transfer prices at which Helpco should offer to transfer special ingredient Z to Manuco in order that group profit maximizing decisions are taken in each of the following situations:

1. Helpco has an external market for all production of special ingredient Z at a selling price of GHS15 per kg.
2. Helpco has production capacity for 9,000kg of special ingredient Z. an external market is available for 6,000 kgs of material Z.
3. Helpco has production capacity for 3,000 kg of special material Z. an alternative use for some of its spare production capacity exists. This alternative use is equivalent to 1,000kg of special ingredient Z and would earn a contribution of GHS6,000. There is no external demand.