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Transfer pricing

Forums › Ask CIMA Tutor Forums › Ask CIMA P2 Tutor Forums › Transfer pricing

  • This topic has 3 replies, 3 voices, and was last updated 8 years ago by Cath.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • September 17, 2016 at 4:58 pm #340795
    Agboola
    Member
    • Topics: 4
    • Replies: 2
    • ☆

    Example 6 refers please. Assuming B can sell externally at $28 instead of $35, what would be the range of transfer price. (Other information remains the same)

    September 18, 2016 at 12:21 pm #340846
    Cath
    Participant
    • Topics: 0
    • Replies: 447
    • ☆☆☆

    Hi,
    Thanks for your question.

    Ok – so Division A can sell the part-finished units by selling externally at $20 each. Because Division A has limited capacity they will not sell their part to division B at anything less than $20.

    For Division B to sell the finished product they firstly need to do $10 per unit extra work on the part finished units received from A.
    Therefore if the market price for Division B’s finished product was $35 per unit ….then the sensible transfer price range would be from between $20 (Div A’s minimum) to $25 ($35-10 which is market price less cost of conversion).

    However, if the external market price for Division B is reduced to $28 per unit – then Division B would be looking to pay at most $18 (28 – 10).
    As you know Division A will not accept less than $20 so this is a conflict.

    If Division B can not source the product for cheaper elsewhere and can not reduce its $10 conversion costs – then it is best for the company as a whole for Division B to withdraw the product from its range and leave A to sell its part finished goods at $20. (see below from whole company perspective)

    A & B Company (Division A & B)
    Sales = $28 p.u
    Less costs for A =$15 p.u
    less costs for B = $10 p.u
    Profit per unit = $3

    Whereas if Division A sells externally and Division B withdraws:
    A & B Company profit will be:
    Sales $20 per unit
    less cost for A = $15
    Profit per unit is $5

    Hope that explains ok 🙂
    Cath

    September 20, 2016 at 1:24 pm #341012
    abz12
    Member
    • Topics: 46
    • Replies: 44
    • ☆☆

    on behalf of original poster. thanks! I was stuck too

    September 20, 2016 at 11:15 pm #341070
    Cath
    Participant
    • Topics: 0
    • Replies: 447
    • ☆☆☆

    You’re welcome 🙂

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    Posts
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