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Transfer Pricing question#1

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Transfer Pricing question#1

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.
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  • November 10, 2021 at 3:50 pm #640369
    AshleyMarc1997
    Member
    • Topics: 48
    • Replies: 24
    • ☆☆

    Example 1
    Conference Co has a divisionalised structure. One of its divisions, Division X, sells all its output to
    other divisions within the company.

    Division X’s annual budgeted output and costs are as follows:
    Units sold = 1,050
    Direct materials = $22,500
    Direct labour = $45,350
    Overheads (40% variable) = $37,150

    What transfer price per unit will result in a profit margin of 20% for Division X (to the nearest whole $)?

    The correct answer is $125

    I don’t understand why the examiner has included fixed overheads in his calculation because it is from examiner report 2020. Please explain why the examiner include fixed cost because we learned that transfer price is calculated using variable costs?

    November 10, 2021 at 5:00 pm #640382
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51579
    • ☆☆☆☆☆

    If we are using ‘sensible’ transfer pricing (i.e. determining a range of transfer prices that ensure goal congruence) then we do ignore fixed costs (on the assumption that the company is making many different products as I explain in the my lectures).

    However that is not what this question is asking for. It asks what transfer price will result in a profit of 20% for the division, and the profit is calculated after subtracting all costs as is usually the case.

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