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 This topic has 5 replies, 2 voices, and was last updated 3 months ago by John Moffat.

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September 20, 2017 at 7:21 am #408010adarsh1997
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Hi John!
I need your help for a question in concerning TP.
Division A, which is a part of the ACF Group, manufactures only one type of product, a Bit,
which it sells to external customers and also to division C, another member of the group.
ACF Group’s policy is that divisions have the freedom to set transfer prices and choose their suppliers. The ACF Group uses residual income (RI) to assess divisional performance and each year it sets each division a target RI. The group’s cost of capital is 12% a year.Division A
Budgeted information for the coming year is:
Maximum capacity 150,000 Bits
External sales 110,000 Bits
External selling price $35 per Bit
Variable cost $22 per Bit
Fixed costs $1,080,000
Capital employed $3,200,000
Target residual income $180,000
Division C provisionally requests a quotation for 60,000 Bits from division A for the coming year.
Calculate the transfer price per Bit that division A should quote in order to meet its
residual income target.
(b) Calculate the two prices division A would have to quote to division C, if it became
group policy to quote transfer prices based on opportunity costs.1. The answer for part (a) is $29.90.
How to obtain the answer? I have calculated the targeted contribution which is $1644000( it is correct). I’ve divided that with 60,000 units but it’s wrong.2. For part (b), what the question actually wants? If there is a single policy by the company, then can how 2 TP be obtained?
Thanks.
September 20, 2017 at 8:27 am #408045John MoffatKeymaster Topics: 57
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Does whatever book you found this question in not show the workings as well? (If it doesn’t then you should be using a different book!!)
Target RI = 180,000.
This is after interest of 12% x 3,200,000 = 384,000.
Therefore target profit = 180,000 + 384,000 = 564,000.They will be producing 150,000 units in total (the maximum capacity) and therefore the costs will be (150,000 x $22) + $1,080,000 = 4,380,000
Therefore the revenue needed is 564,000 + 4,380,000 = 4,944,000.
The external sales will be 90,000 x $35 = 3,150,000
Therefore the revenue needed from the 60,000 sold to C is 4944000 – 3150000 = 1794000
Therefore the price per unit = 1794000/60000 = $29.90
For part (b), no problem having two transfer prices – one price for the first 40,000 units (because they have spare capacity) but then another price for the remaining 20,000 units (because they would reduce external sales).
August 23, 2022 at 11:29 am #664027accaamnaacca Topics: 14
 Replies: 8
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why have we satisfied external sales first?
August 23, 2022 at 11:31 am #664029accaamnaacca Topics: 14
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also some questions mentions that “group’s policy is that group
companies and divisions must always make internal sales first before selling outside
the group” what if they don’t mention anything like this?August 23, 2022 at 11:33 am #664030accaamnaacca Topics: 14
 Replies: 8
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accaamnaacca wrote:why have we satisfied external sales first?
oh got it. we don’t know the selling price for internal sales ,thats what we are calculating.
August 23, 2022 at 11:49 am #664039John MoffatKeymaster Topics: 57
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They haven’t satisfied external sales first. The question says that C wants a quote for 60,000 units. If they supply them with 60,000 then they can only sell the reminder of their capacity externally.
Have you watched my free lectures on transfer pricing?

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