TRANSFER PRICING REVIEW QUESTION

Unity Limited has two departments: Department $x$ and $Y$ each with its own manager who

has authority to make decisions for his area..

Department $x$ produces a component which it transfers to Department $Y$ and also sells to

outsiders. An outside company has approached Department $Y$ with an offer to supply

$5,000$ units of the same component for Shs$.30$ each.

The following are the details for Department $x$ :

Sales revenue:

Sales to Department Y $10,000$@Shs$\mathrm{.}50$ per unit

External sales $6,000$@$,$ Shs$\mathrm{.}60$ per unit

Less:

Variable cost $16,000$@Shs$\mathrm{.}25$ per unit

Fixed costs

Profit

Profit

The manager of Department $Y$ has decided to buy from the outside company.

Calculate the impact of the decision on the profits of Department $x,$ assuming that

the external sales of the component will remain at the same level.

company woald let go the offor $-$

Shs$.$

$500,000$

$\frac{360,000}{860,000}$

$[400,000],[100,000]$

$500,{000}_{{?}_{?}}$