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- This topic has 4 replies, 2 voices, and was last updated 5 years ago by John Moffat.
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- May 10, 2018 at 5:28 pm #451077
Hi My Dear Tutor, I have a question.
I will not type this question in detail here as you last time said that ACCA become angry at opentuiton.
My question here is that, if division l has capacity of 300000 units and if external demand is 160000 units and if internal demand 120000 units meaning that there is spare capacity and division L sell 120000 units at only varibale cost which is 20 $.This 20$ is the transfer price but in the section of Product M why component l has been shown as a transfer price of 40$?
Again and again my transfer pay is 20 $ but it has been showed 40$ in the product M section even we calculate transfer price at 20$ and if we deduct 20$ from 40$ there is still 20 $ which decreases contribution to 26 $ which should have been 46$ for Product M
”In question part B it mentions using the quantities calculated in (a)”
In the question itself even there has not been mentioned transfer price should be taken 40$ for part b solution not 20$ and if you say that it has been showed in the Product M section, my response will be maybe they want to make a trick for students ?
I watched your lectures and done some question but when i came to this question how it can be?
there is spare capacity transfer price will be at variable cost excluding selling and distribution cost.
there is not spare capacity and transfer price will be at lost contribution(opportunity cost)+variable cost.
the formula mentioned above is the main thing we have to follow.
I do not definitely think the question is right.It is not right question.
May 10, 2018 at 6:27 pm #451097The question (and answer) is perfectly right 🙂
Part (b) of the question specifically asks you to use the current transfer price, and the current transfer price is given in the question as $40.
It is only in part (c) that the ask you to advise on a suitable alternative transfer price.
May 10, 2018 at 7:14 pm #451112if the current transfer price is 40$ but why did you use 20$ transfer price also?
May 10, 2018 at 8:26 pm #451123My dear tutor,i understood why 20$ used as transfer price but it does not make a sense of using current transfer price 40$
40$ can be used when group has been taken into consideration and in that case group’s 24$ can be used not 20$.
This question is tricky.May 11, 2018 at 6:47 am #451168But again, part (b) specifically asks you to use the current transfer price. From the table in the question, L is currently selling to M at $40 per unit and so this is the transfer price.
L has a marginal cost of $20 per unit, and therefore is making a contribution of $40 – $20 = $20 per unit on goods transferred to M.
When L sells externally they are marginal costs of $24 (because of the extra selling costs) and are therefore making $40 – $24 = $16 contribution on goods sold externally.Division M is making a contribution of $26 per unit, directly from the question.
Obviously, it would be more sensible for L to charge a lower transfer price, but that is not relevant for part (b). That is why part (c) asks you to explain the problems if they keep it at $40, and so suggest a suitable alternative.
All questions in F5 are meant to be tricky, but the problem here is one of reading carefully what the question is asking for.
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