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Hello John
I have a doubt regarding a question kindly tell me whether my working is right or wrong
Question
Campbell sells a new product jem which has a selling price of 115$per unit ,the quantity of sales is 2000per month of jem
The estimated cost per unit is :raw material 8.5 kg @$2per kg
Special ingredient x :2 kg
Other Variable cots are 60%of the selling price
Campbell has been offered supplies of special ingredient x at a transfer price of $15 per kg by max which is a part of same group.this Is the same price which it charges to it’s costumer.max bases it’s external prices on cost plus 25% profit markup.total cost has been estimated as 75% Variable and 25% fixed . internal transfer to Campbell would allow$1.50 per kg of variable packing cost to be avoided, currently there are no other supplier of x
In this scenario
1)the maximum transfer price which would be acceptable by Campbell is 15$ as there is no external supplier and this is the market rate
2)the minimum transfer price max would be prepared to pay If there is monthly capacity of spare production of 4000kg is 12 as there is no opportunity cost involved here
3)if there is external market for all of the product if x then the transfer price would me marginal cost+the opportunity cost ie 12 is the cost price and in this 12 ,75% is variable that is 9 + the opportunity cost that is the contribution (6) so the transfer price will be 12+6=18
4) if Max has an alternative use for some of it’s spare production capacity.this alternative use is equivalent to 2000 kg of special ingredient x and would earn a contribution of $6000.so for the 2000 units the transfer price will be 12+3 (6000÷2000=3) and the rest 2000 units should be transferred at 12 .please tell me whether all the Working above are right or correct me if I’m wrongWhy on earth are you attempting questions for which you do not have an answer? You should be using a Revision Kit from one of the ACCA approved publishers, in which case you will have an answer to check to and should then ask me about anything in the answer that you are not clear about.
If you have been set this question as an assignment, then we do not provide or check answers to assignments.
However the maximum transfer price is not $15 per kg. Since there is no external supplier, the maximum is the Campbell’s net marginal revenue of $14.50 per kg..
Given that there is no mention of capacity of Max or the external demand from Max, then you would assume always that they could sell of their production externally. Therefore the minimum transfer price is the marginal cost of $9, plus the lost contribution of $6, less the saving on packing cost of $1.50. So $13.50.
I do suggest that you watch my free lectures on transfer pricing. The lectures are a complete free course for Paper F5 and cover everything needed to be able to pass the exam well.
Thank you John..I appreciate your reply
I have some confusion hope you don’t mind clearing it
The maximum transfer price if no other alternative market is available is the price what the supplying division charges to the external sales -any savings that is made on packing or delivery am I Right? And how did you get 14.50 could you please explain me that ?and are all other working in my first question correct…I hope you don’t mind John..like asking questions related to this again and again ??And if there is spare capacity we should only consider the marginal cost of production right ? Or if there is any selling and distribution involved we should deduct the cost saved from the marginal cost ???
You have not replied to my question as to why you are attempting questions for which you do not have an answer to.
Also, you are effectively asking me to type out my lectures, which you cannot expect me to do! Why are you not watching the free lectures?
The maximum price is not the price the supplying division charges to external sales. That is the minimum price (and if there are external sales then there is an alternative market!)
The 14.50 is the net marginal revenue – the external selling price by Campbell less their variable costs.
If there is spare capacity, then the minimum TP is the marginal cost of production, and saved selling and distribution costs is of no relevance at all – how can they be if they are not being saved!!You must watch my free lectures!!
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