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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) = $37,150What 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?
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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