- This topic has 1 reply, 2 voices, and was last updated 8 years ago by
.
- Posts
Dear professor.
Nowadays i’ve bent over backwards to go through the Transfer pricing part…
Originally, i studied and read the F5 Kaplan text book, and i was sure i fully understood all contents.
However, MCQ 213 is not in the criteria i’ve studied in the Kaplan book, so i found the exact relevant contents in the BPP book.
the content i found is like ” In order to get the maximum transfer price. The lowest market price at which the receiving division could purchase the goods or services externally less
any internal cost savings in packing and delivery.”when i applied this knowledge to the MCQ 213 question,
213 MCQ. When goods are transferred from one division in a company to another division, and there is an intermediate external market for the transferred item in which the goods could be sold, which of the following states the economic transfer pricing rule for what the maximum transfer price should be?
the answer is ” The lower of the net marginal revenue for the transferring-in division and the external purchase price in the market for the intermediate product.”
their explanation is like ” For example, if the marginal cost of a transferred item is $5 and it has an external intermediate market of 7$ but external costs of $0.5; and if the transferring-in division can use the transferred item to make an end product that earns a contribution of $10, the maximum transfer price should be the lower of $7 and $10. The minimum transfer price should be $5+$(7-5-0.5)=$6.5
In this explanation, i found some inconsistency between knowledge from the textbook and the explanation, because the answer format doesn’t follow the format( The lowest market price the receiving division could purchase at – any internal cost savings in packing and delivery)
i don’t know what i missed in this part…even there is no lowest market price i can use for this format.
just to be sure, i’d like to check how to figure out minimum transfer price.
i think the first $5 is the marginal cost from the transferring-in division and the reason why they deduct $5(VC) and $0.5(selling cost) from $7(external market price) is that they aim to figure out the opportunity cost, so that’s why the last format is $5+$(7-5-0.5)=$6.5am i right?
please help me to get out of hell….
thank you for your kindness and lectures.
Regard your student.
But why have you not watched my free lectures on this? The lectures are a complete free course for Paper F5 and cover everything needed to be able to pass the exam well.
You cannot simply learn a format for transfer pricing (or, in fact, for most of Paper F5) because the examiner deliberately designs questions to check that you understand the logic and have not just learned rules.
The minimum transfer price is determined by the transferring division and is the marginal cost plus any lost contribution (which is only relevant if there are capacity constraints in the division).
In your question, they subtract $5 and $0.50 in order to get the lost contribution.
- The topic ‘help me with BPP REVISION MCQ 213’ is closed to new replies.