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Given: The company’s average annual 12% cost of capital is used to calculate the finance charges.
In solution to Part A of the question, there is a computation for interest charge:
Interest Charge
$750K/$1500K * 12% COCDivision FD = (90)
Division TM = (180)I did not understand how they have worked this out. Kindly explain.
Interest charge
Cost of cap * Capital Employed
FD 0.12 * 750,000 = 90,000. RI = Profit – imputed interest charge so 90 – 90 = 0
TM. 0.12 * 1,500,000 = 180,000. RI = Profit – imputed interest charge so 360 – 180 = 180
You are probably looking at this from the wrong division?
why is the Transfer price not included in the calculation of TM Division’s net profit, however, the internal sales are considered in the FD Division net profit calculation. what is the reason for exclusion from TM?
First of all can I say that you are getting fixated on a question that has no date at the side of it in the kit.
This either means it is a very old question from a different examiner or really is a Kaplan-modified question!!!!!!!
Second of all you must watch the lecture on transfer pricing!!!!!!!
That being said I will answer your question
FD makes and sells moulding to TM and outside to external buyers. TM uses the moulding for its agricultural equipment.
Hence why their are internal sales of 15000 * $66 being made to TM (at the $66 transfer price)
and therefore TM has a production cost of $366 which includes the $66 transfer price
You obviously do not understand TP please watch our excellent lecture on this topic.
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