Sir can u pls explain the answer of this question
Manuco has been offered supplies of special ingredient of Z at a transfer price of $15 per kg by Helpco company, which is part of the same group of companies. Helpco processes and sells special ingredient Z to customers external to the group at $15 per kg. Helpco bases its transfer price on full cost plus 25% profit mark-up. The full cost has been estimated as 75% variable and and 25% fixed. Internal transfers to Manuco wopuld be enable $1.50 per kg of variable packing cost to be avoided.
Discuss the transfer price at which helpco should offer to transfer special ingredient Z to Manuco.
1) Helpco has production capacity for 9000 kg of special ingredient Z, AN external maeket is available for 6000 kgs of material Z.
The answer was: VC - Packaging cost
(9- 1.50)= 7.50
Working for VC: Total cost= 15 x 80% = $12, Variable cost - $12 x 75%= 9
I'm confused on how did they get 80%, and why did they multiply it by 15.
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Transfer price
10y ago#1They are selling at cost + 25%.
So for every $100 cost, they add on $25, and sell for $125.
Putting it the other way round, for every $125 sales they have a cost of $100, which is 100/125 or 80% of the selling price.
Since they are actually selling at $15 per kg, the cost must be 80% x $15 = $12 per kg.
(and of course it checks - the profit is 25% x $12 = $3, which is also the difference between $15 and $12)
ok thank u sir :)
10y ago#3You are welcome :-)
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