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PM Chapter 18 Questions Transfer Pricing

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  2. Dear Sir, could you please explain what is the external purchasing price on Q4 and Q5?As you explain, the maximum trasfer price = min(extenal purchasing price,net marginal revenue).But I do not find the external purchasing price in this question.Thank you

      • Dear sir, there is 1 same sample In Revision kit bit I do not understand how to do.Please help me to explain: If the marginal cost of a transfer item is 5 usd and it has external intermediate market of 7 usd. And if the transferring in division can use the trasfered item to make an end product that earns contribution of 10 usd.What is the maximum transfer price?

  4. in Questions 5 and 6, why is the maximum price 50, and not 40? From what i’ve learned, the maximum price is the external price – internal savings (which in this case is 40).

    • The maximum transfer price is the lower of any external purchase price and the net marginal revenue (which is the final selling price less marginal costs of that division).

      I do suggest that you watch my free lectures where the ‘rule’ is explained in detail with examples.

    • At the moment, the company is making the component itself (in division P) and it is costing the company $240 per unit.
      If they buy from Alpha they will instead be paying $350 per unit which is $110 per unit more.

      However, because they would then be closing division P, they would save the fixed costs of $24,000 per year.
      The question is asking what the net affect will be on the companies profits.

      Did you watch the lectures before attempting the test?

      The test questions are certainly exam standard (although you need to practice many more questions which is why it is essential that you buy a Revision Kit from one of the ACCA approved publishers – they are full of exam standard questions to practice).

  8. sir in question 2 if Q didnt buy externally and i am assuming the SP is 1000 p.u co the total cost would be (240+396)p.u and the profit p.u is 364 but if Q bought externally at assuming the same SP 1000p.u and cost 350 giving a profit of 650 therefore there is a increase in profit of (650-364) kindly explain tome where i am going wrong? thanks

    • I don’t think you can have watched the free lectures, because as far as the company as a whole is concerned the transfer price is irrelevant.

      If they produce themselves then the cost is 240, if they buy externally the cost is 350. So the company would have extra cost of 110 per unit. However they would save the fixed overheads of 24,000.

      I do suggest that you watch the free lectures.

    • Well it would be if it were not for the fact that I work through an almost identical example in my free lectures on transfer pricing!! 馃檪

      Did you not watch the lectures before attempting the test?

  11. Hi John

    Thank you for the excellent work that you’ve done so far.

    I wanted to ask:
    In question 2. I calculated the division P total profit ($396×4000) – MRG cost ( $250×4000) – Fixed costs (24000) = 600’000
    Then from the total profit I subtracted the difference in the price (396-350)x4000 = 184000
    Which results 416000 Decrease from total profit.
    Is this a correct way?

    In question 3: I did this calculation: Variable cost of Y ($100) + (2 x $20) = $140
    $20 — Contribution p.u of product X
    2 — Since product y takes two times more to make (10/5)
    Is this also a correct way?

    Thank you in advance

  12. Sir,I’m confusing in Q3 that we need more information about product X.I mean if X is over capacity or market demand surplus.I woud rather produce Y hence transfer price shoud be 130.(Sorry for my poor english presentation.Hope you understand)

  14. sir,with regard to question 3,my lost contribution is coming 10 because we have 10 hours to make 1 unit of y getting contribution of $3 per hour.As labour hours are limited so we would rather make x because we are getting $4 per hour but b division want y so we will give it y in marginal cost +lost contribution.In order to make y we need 10 labour hour giving contibution of $3 but instead if we make x getting contribution of $4 so all we lost is $1.It is making sense but giving answer wrong.please explain where i am wrong.

    • You have obviously not watched my lectures because I work through this example in the lectures (and explain).
      The lectures are a complete free course for F5 and cover everything needed to be able to pass the exam well.

      They would indeed have only lost $1 per hour, but only if the transfer price had been $130. So as not to lose the $1 therefore, they need the transfer price to be 130 + (10 x 1) = $140

      I do suggest that you watch the lectures before attempting the tests.

      • As this way,Y should be shut down and never produced. Because external selling price is just 130.

    • The minimum transfer price = marginal cost + any lost contribution.

      The marginal cost is $30, and since there is limited capacity and unlimited external demand, there is a lost contribution of 40 – 30 = $10 from not being able to sell externally.

      So a total of $40.

      I do suggest that you watch my free lectures because I work through a virtually identical example (among lots of other examples on transfer pricing).

  16. Hello Sir,

    I have a question on 5.

    I thought the minimum transfer price the seller should have set is VC so 拢30+ any lost in contribution which is 拢40= 70
    But the answers says that the minimum price Division A should charge is 40.

    Could you explain?

      • No – you are not correct.

        There is no lost contribution because A has unlimited production capacity, and there is limited external demand from A.

        Therefore the minimum transfer price is simply the marginal cost.

        There is only going to be lost contribution when the transferring division has limited production capacity.

        (Have you watched my free lectures on transfer pricing? Because this example is virtually identical to one of the examples I work through (and explain) in my lectures.)

  18. Hi John

    Can you work through the question on the division selling products X and Y, where there is limited labour. It is not making sense to me. I am not sure I understand the question. Can you please walk through it.

    The answer is taking the contribution per unit of the product we are not transferring and multiplying it by the hours spent making the product we are transferring,this is added to the maginal cost.

    • If they were not transferring product Y then they would produce X instead and sell externally getting a contribution per hour of $4.
      If they do transfer Y then they need as always to cover the marginal cost (100) plus the lost contribution. Since each unit of Y takes 10 hours to make, they are losing contribution that could have been made from selling X of 10 x $4 = $40.
      Therefore the minimum transfer price has to be $140 per unit.

      (It seems as though you are not bothering to watch the lectures, because I go through an almost identical example in the lecture.)

    • Hemraj:If they were not transferring product Y then they would produce X instead and sell externally getting a contribution per hour of $4.
      If they do transfer Y then they need as always to cover the marginal cost (100) plus the lost contribution. Since each unit of Y takes 10 hours to make, they are losing contribution that could have been made from selling X of 10 x $4 = $40.
      Therefore the minimum transfer price has to be $140 per unit.

      (It seems as though you are not bothering to watch the lectures, because I go through an almost identical example in the lecture.)

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