ACCA PM Syllabus E. Performance Measurement And Control - Transfer Pricing - Past Papers ^{1 / 2}

Perrin Co has two divisions, A and B.

Division A has limited skilled labour and is operating at full capacity making product Y. It has been asked to supply a different product, X, to division B. Division B currently sources this product externally for $700 per unit.

The same grade of materials and labour is used in both products. The cost cards for each product are shown below:

Using an opportunity cost approach to transfer pricing, what is the minimum transfer price?

A. $270
B. $750
C. $590
D. $840

Ox Co has two divisions, A and B. Division A makes a component for air conditioning units which it can only sell to Division B. It has no other outlet for sales.

Current information relating to Division A is as follows:
Marginal cost per unit                                                        $100
Transfer price of the component                                        $165
Total production and sales of the component each year   2,200 units
Specific fixed costs of Division A per year                         $10,000

Cold Co has offered to sell the component to Division B for $140 per unit. If Division B accepts this offer, Division A will be closed.

If Division B accepts Cold Co’s offer, what will be the impact on profits per year for the group as a whole?

A Increase of $65,000
B Decrease of $78,000
C Decrease of $88,000
D. Increase of $55,000

A manufacturing company, Man Co, has two divisions: Division L and Division M. Both divisions make a single standardised product. Division L makes component L, which is supplied to both Division M and external customers.

Division M makes product M using one unit of component L and other materials. It then sells the completed product M to external customers. To date, Division M has always bought component L from Division L.

The following information is available:

Division L charges the same price for component L to both Division M and external customers. However, it does not incur the selling and distribution costs when transferring internally.

Division M has just been approached by a new supplier who has offered to supply it with component L for $37 per unit. Prior to this offer, the cheapest price which Division M could have bought component L for from outside the group was $42 per unit.

It is head office policy to let the divisions operate autonomously without interference at all.

Required:
(a) Calculate the incremental profit/(loss) per component for the group if Division M accepts the new supplier’s offer and recommend how many components Division L should sell to Division M if group profits are to be maximised. (3 marks)

A manufacturing company, Man Co, has two divisions: Division L and Division M. Both divisions make a single standardised product. Division L makes component L, which is supplied to both Division M and external customers.

Division M makes product M using one unit of component L and other materials. It then sells the completed product M to external customers. To date, Division M has always bought component L from Division L.

The following information is available:

Division L charges the same price for component L to both Division M and external customers. However, it does not incur the selling and distribution costs when transferring internally.

Division M has just been approached by a new supplier who has offered to supply it with component L for $37 per unit. Prior to this offer, the cheapest price which Division M could have bought component L for from outside the group was $42 per unit.

It is head office policy to let the divisions operate autonomously without interference at all.

Required:
(b) Using the quantities calculated in (a) and the current transfer price, calculate the total annual profits of each division and the group as a whole. (6 marks)

A manufacturing company, Man Co, has two divisions: Division L and Division M. Both divisions make a single standardised product. Division L makes component L, which is supplied to both Division M and external customers.

Division M makes product M using one unit of component L and other materials. It then sells the completed product M to external customers. To date, Division M has always bought component L from Division L.

The following information is available:

Division L charges the same price for component L to both Division M and external customers. However, it does not incur the selling and distribution costs when transferring internally.

Division M has just been approached by a new supplier who has offered to supply it with component L for $37 per unit. Prior to this offer, the cheapest price which Division M could have bought component L for from outside the group was $42 per unit.

It is head office policy to let the divisions operate autonomously without interference at all.

Required:
(c) Discuss the problems which will arise if the transfer price remains unchanged and advise the divisions on a suitable alternative transfer price for component L. (6 marks)

Mobe Co manufactures electronic mobility scooters. The company is split into two divisions: the scooter division (Division S) and the motor division (Division M). Division M supplies electronic motors to both Division S and to external customers. The two divisions run as autonomously as possible, subject to the group’s current policy that Division M must make internal sales first before selling outside the group; and that Division S must always buy its motors from Division M. However, this company policy, together with the transfer price which Division M charges Division S, is currently under review.

Details of the two divisions are given below.

Division S
Division S’s budget for the coming year shows that 35,000 electronic motors will be needed. An external supplier could supply these to Division S for $800 each.

Division M
Division M has the capacity to produce a total of 60,000 electronic motors per year. Details of Division M’s budget, which has just been prepared for the forthcoming year, are as follows:

The variable cost per unit for motors sold to Division S is $30 per unit lower due to cost savings on distribution and packaging.

Maximum external demand for the motors is 30,000 units per year.

Required:
Assuming that the group’s current policy could be changed, advise, using suitable calculations, the number of motors which Division M should supply to Division S in order to maximise group profits. Recommend the transfer price or prices at which these internal sales should take place.

Note: All relevant workings must be shown.

Oxco has two divisions, A and B. Division A makes a component for air conditioning units which it can only sell to Division B. It has no other outlet for sales.

Current information relating to Division A is as follows:

Cold Co has offered to sell the component to Division B for $140 per unit. If Division B accepts this offer, Division A will be shut.

If Division B accepts Cold Co’s offer, what will be the impact on profits per year for the group as a whole?

A. Increase of $65,000
B. Decrease of $78,000
C. Decrease of $88,000
D. Increase of $55,000