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Dear Tutor ,
May I know for the question mentioned above ,4a) why transfer price from housing to assembly division is based on budgeted total production cost (6902+1302-575) instead of actual production cost?for answer 4c) why profit for housing ,electrical ,assembly add up total ((8617)+335+2719)=loss 5563 but overall profit for Landual showed profit 2641??
Dear Sir
4 a) Among divisions when deciding transfer prices the rational should be to promote internal efficiency as such transfer price based on standard cost is good indicator as compared to price based on actual cost, else there will not be any motivation for supplying division to control cost. By setting transfer price based on standard cost is an indication to supplying division that it has to control cost to that extent else it will have to bear the overstepped cost to its account and for a company as a whole it makes sense.
4c) Overall profit would be same as that is the profit earned from outside sell for the company as a whole. Transfer pricing mechanism should give fair opportunity and autonomy to internal divisions to show their performance depending on their stature i.e either as Cost Center or Profit Center.
This is what I feel , Expert Tutor would be able to fine tune this answer as I am also student like you.
Deepak
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