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Hi Sir,
Question;
Division x
Units sold 1050
Direct material £22500
Direct labour £ 45350
Overhead (40% variable) £37150What transfer price will result in a profit margin of 20% for div X?
The answer is £125. They added all the costs / 0.80.
I don’t know why they have accounted for 60% of the fixed overhead as I assumed only to take the 40% VC with the rest of the costs.Thank you
Because the question said that the profit margin must be 20% then it implies that they are using all cost plus transfer pricing, because the profit is the selling price less all costs.
Had the question said that they wanted a contribution of 20% of sales then it would imply that the were using marginal cost plus transfer pricing, and then you would have been correct to only use the variable costs.
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