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Sir this is one of the three parts of a 15 mark question came this june session as far as I remember.Numbers may not b precise but the pattern is exactly the same as it was in the question.
It says, a company has two division, M and N.M sell parts to N also to external customers.
M: Capacity 30000 unit
External demand 14000 unit
Internal demand 14000 unit
Annual fixed costs 60000$
Marginal cost for external sell $24 and selling price is 40$ per unit.
Marginal cost for internal sell is 20$ per unit and current transfer price is 40$ per unit.N : Have got a proposal from external supplier to purchase at $37.
What should be the reasonable transfer price?? I calculated minimum transfer price absorbing fixed cost, and maximum range is 37$.. I am confused,should I absorbed fixed cost and should not 🙁In general you do not absorb fixed costs (I assume that you have watched my free lectures on transfer pricing in which I explain the reasons).
However without seeing the exact question, I cannot say more about this particular question.
A manufacturing company, Man Co, has two divisions: Division L and Division M. Both divisions make a single
standardised product. Division L makes component L, which is supplied to both Division M and external customers.
Division M makes product M using one unit of component L and other materials. It then sells the completed
product M to external customers. To date, Division M has always bought component L from Division L.
The following information is available:
Component L Product MSelling price 40 96
Direct materials:
Component L (40)
Other (12) (17)
Direct labour (6) (9)
Variable overheads (2) (3)
Selling and distribution costs (4) (1)
––– –––
Contribution per unit
before fixed costs 16 26Annual fixed costs $500,000 $200,000
Annual external
demand (units) 160,000 120,000Capacity of plant 300,000 130,000
Division L charges the same price for component L to both Division M and external customers. However, it does not
incur the selling and distribution costs when transferring internally.
Division M has just been approached by a new supplier who has offered to supply it with component L for $37 per
unit. Prior to this offer, the cheapest price which Division M could have bought component L for from outside the
group was $42 per unit.
It is head office policy to let the divisions operate autonomously without interference at all.That is the whole real question from the exam.
What will be the profits/(loss) for each division if the external supplier’s offer is accepted?And what will be the total profit of the company if the external supplier’s offer is accepted?Sorry, but the purpose of forum is not to simply provide answers to questions!
The purpose of the forum is to help you with things that you are not sure about in our lectures, and to explain whatever parts of answers to questions that you do not understand.
The ACCA will publish answers to a selection of questions from the June exam in the next few weeks.
(And I assume of course that you did watch all of my free lectures on transfer pricing!)
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