Question:

Porter Division is part of the Hurry Group. It produces a machine spare part at a cost of $20 which is then transferred to Hermy Division within the group which has additional costs of $10. Hermy Division sells externally at $32. The spare part is also produced in other divisions within the Hurry Group and a limited quantity can be purchased from outside the group. Hurry Group has a policy of transfer price at cost plus 20%.

REQUIRED:

1. a) Determine the profit of each division and overall profit of Hurry Group.

2. b) Analyse the result above and problem arise on the current transfer pricing method used by the company.