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Hi John
I need some help with this question. It is from Becker revesion book. I am confused a bit.
A company has budgeted to produce y units of a product in one of its divisions. Total costs for the division are expected to be
Direct materials – £a
Direct labour -£b
Overheads (40percent variable) -£cWhat transfer price per unit will generate a desired divisional profit of 10percent on sales?
Answer: (a+b+c)/0.9y per unit
Can you please explain it.
Thanks
OksanaI actually explain this in my lectures on target costing (because it is more of a target cost problem then a transfer pricing problem!)
Since the profit is 10% of selling price, for every $100 selling price the profit will be $10 and the cost will be $90.
Or – putting it the other way round – for every $90 cost, the selling price will be $100.So if the cost is (a + b + c), then the selling price will be 100/90 x (a + b + c) (which if you try it is the same as (a + b + c) / 0.9
Hi,
i am confusing the question as below :
Orange Company, has two divisions: A and B. A currently sells a diode reducer to manufacturers of aircraft navigation systems for $1,550 per unit. Variable costs amount to $1,000, and demand for this product currently exceeds the division’s ability to supply the marketplace.
Despite this situation, Orange Company is considering another use for the diode reducer, namely, integration into a satellite positioning system that would be made by B. The positioning system has an anticipated selling price of $2,800 and requires an additional $1,340 of variable manufacturing costs. A transfer price of $1,500 has been established for the diode reducer.
Top management is anxious to introduce the positioning system; however, unless the transfer is made, an introduction will not be possible because of the difficulty of obtaining needed diode reducers. A and B are in the process of recovering from previous financial problems, and neither division can afford any future losses. The company uses responsibility accounting and ROI in measuring divisional performance, and awards bonuses to divisional management.
Required:
(a) How would A’s divisional manager likely react to the decision to transfer diode reducers to B? Show computations to support your answer.
My answer – Diode reducer divisional manager will unhappy as the selling price is $1550 but the transfer price is $1500, need suffer $50 per unit(b) How would B’s divisional management likely react to the $1,500 transfer price? Show computations to support your answer.
Cost based – ($2,800 – $$1,500) = -$1,300 (Profit = $0)(c) Assume that a lower transfer price is desired. Should top management lower the price or should the price be lowered by another means? Explain.
Optimum Transfer price = MCss + Opportunities Cost or Market price – cost save
= $1,340 + $550 = $1,890(d) From a contribution margin perspective, does Orange Company benefit more if it sells the diode reducers externally or transfers the reducers to B? By how much?
Diode reducer more profitable sell to externally because it get the profit $550. If diode reducer sell to division B, it will suffer $50 loss.Is it have any mistake for my answer and explanation. Please advice.
Thanks.
I understood that. I thought we need to use variable cost 0.4c, not full cost c.
Oksana
Lychee:
You must not type out a full question like this because of copyright problems.
Also, you cannot expect me to work through all of that and check your answer!!! You must have an answer in the same book in which you found the question and so you can check there to see if you are correct. If you are wrong and do not understand what the answer has done, then ask about that specific point.
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