ACCA PM · Guided practice (Show me how)
Chapter 18: Transfer Pricing
Transfer pricing - why cost-plus can fail, and the sensible range
(a) Cost-plus transfer price. Division A has costs of $20 p.u., and transfers goods to Division B which has additional costs of $8 p.u. Division B sells externally at $30 p.u. The company has a policy of setting transfer prices at cost + 20%.
Calculate: (i) the transfer price; (ii) the profit made by the company overall; (iii) the profit reported by each division separately. Determine the decisions that will be made by the managers and comment on whether or not goal congruent decisions will be made.
(b) Goal-congruent price range. For the same two divisions (A's costs $20 p.u.; B's additional costs $8 p.u.; B sells at $30 p.u.), determine a sensible range for the transfer price in order to achieve goal congruence.
Assume, as the notes do, that both divisions make many products and that the costs given are marginal costs. Enter losses as negative figures.
(a)-(c) The cost-plus transfer price
Calculate the company's transfer price, overall profit per unit and profit per unit for each division.
Decisions, and a sensible range
State the divisional decisions at the calculated cost-plus transfer price and calculate the transfer price range at which both divisions would trade.
Opening this exercise…