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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 market 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%= 9I’m confused on how did they get 80%.
The current transfer price is at full cost plus 25%.
So for every $100 cost they add on $25 and transfer for $125.
Therefore the cost is $100 for every $125 transfer price, and therefore for a transfer price of $15, the cost is 100/125 x $15 = $12.The question says that 75% of the cost is variable. So the variable (marginal) cost is 75% x $12 = $9.
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