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Hi Sir
D ltd has 2 divisions. Don and Race. Don makes a component for tablets which it sells to Race. It has no other outlet to sale. Current info on divisions:
1. Incremental cost for Don= 150
2. Incremental cost for Race =250
transfer price= 202.50
final selling price= 600Transfer price is based on 35% markup on incremental cost. What is the profit per tablet for D ltd?
Answer..
Don sells to Race.
Done has cost of 150, Race has cost of 250. Race sells to external market for 600Total group profit
Price= 600
less cost:
1. Don Cost= 150
2. Race Cost= 250 incremental
Amount Race has to pay Don= 202.50
total cost=602.5
profit= -2.5Which is wrong. Could you help me understand why? the solution does not deduct the transfer price Race paid to Don
The transfer price is of no relevance at all when calculating the profit to D Ltd..
As far as D Ltd is concerned the profit is the external selling price less the total costs. The transfer price is income of one division and a cost of the other.
You need to 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.
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