Within the Luxottica Group, Barberini SpA manufactures lenses for use by others within the

Luxottica Group. Barberini also sells lenses to customers external to the group. The following

question presents hypothetical data concerning Barberini's internal and external sales of

lenses.

Relevant revenue, cost and other information associated with the production of lenses by

Barberini is provided below:

External selling price $65.00 per pair

Direct materials $12.50 per pair

Direct labour $10.00 per pair

Variable overhead $10.00 per pair

Fixed overhead $7.50 per pair

Sales commission for external sales $2.00 per pair

Required

1. Measure and discuss the transfer price for lenses for internal sales between Barberini

to other members within the Luxottica Group under the following scenarios:

a. The transfer price is set using negotiated transfer pricing (1 mark).

b. The transfer price is set using variable cost with a 20% mark-up (0.5 mark).

c. The transfer price is set using absorption costing with a 15% mark-up (0.5

mark).

d. The transfer price is set using the general transfer price rule and Barberini has

unlimited capacity (0.5 mark).

e. Barberini has capacity to produce 100,000 pairs per month. Demand from

internal customers is 100,000 pairs per month and demand from external

customers is 20,000 pairs per month (1 mark).

f. Barberini has capacity to produce 100,000 pairs per month. Demand from

internal customers is 90,000 pairs per month and demand from external

customers is 20,000 pairs per month (1.5 mark).

2. Assume that the transfer price for lenses was set using the market price and that an

external supplier has offered one of the assembly departments within the Luxottica

Group to supply lenses for $55.00 per pair. Would it be in the interests of the assembly

department to accept this offer? In what situations would accepting this offer be in the

best interests of the Luxottica Group as a whole? (2 marks).

3. Identify and discuss an optimal transfer price policy for the internal sale of lenses by

Barberini. Outline three key factors which make this an appropriate transfer price

policy (3 marks).

Ensure that your answers for the above are discussed and supported by relevant calculations