Transfer pricing

Question 2 (25 marks)
MCP Limited specializes in providing marketing, data collection, data processing and consulting
services. The company is divided into divisions that provide services to each other and also to external
clients. The performance of the divisional managers is measured against profit targets that are set by
central management.
During October, the consulting division undertook a project for AX Limited. The agreed fee was
N$15 500 and the costs excluding data processing were N$2 600. The data processing, which needed
200 hours of processing time, was carried out by the Data Processing (DP) division. An external agency
could have been used to do the data processing, but the DP division had 200 chargeable skilled hours
available in October.
The DP division provides data processing services to the other divisions and also to external customers.
The budgeted costs ofthe DP division for the year ending 31 December, which is divided into 12 equal
monthly periods, are as follows:
N$
Variable costs
Skilled labour (6000 hours worked ) 120 000
Semi-skilled labour 96 000
Other processing costs 60 000
Fixed costs 240 000
These costs are recovered on the basis of chargeable skilled labour hours (data processing hours)
which are budgeted to be 90 per cent of skilled labour hours worked. The DP division’s external pricing
policy is to add a 40 per cent mark-up to its total budgeted cost per chargeable hour.
During October, actual labour costs incurred by the DP division were 10 per cent higher than expected,
but other costs were 5 per cent lower than expected.
Required:
(a) Calculate the total transfer value that would have been charged by the DP division to the
Consulting division for the 200 hours on its AX pic project, using the following bases:
(i) Actual variable cost;
(ii) Standard variable cost+ 40 per cent mark-up;
(iii) Market price. (6 marks)
(b) Prepare statements to show how the alternative values calculated in answer to requirement
(a) above would reflect in the performance measurement of the DP division and the
Consulting division. {12 marks)
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(c) Recommend, with supporting calculations, explanations and assumptions, the transfer value
that should be used for the 200 hours of processing time in October. Your answer need not
be one of those calculated in your answer to requirement (a) above.