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Division A of L Company manufacturers Product X, which is sold to Division B as a component of


Product Y. Product Y, is sold to Division C, which uses it as a component in Product Z. Product Z is sold to
customers outside the company. The intra company pricing rule is that products are transferred between
divisions at standard cost plus a 10% return on Inventories and fixed costs. From the information provide
below, calculate the transfer price for product X and Y and the standard cost of Product Z.
Standard cost per unit Product-X Product-Y Product-Z
Materials purchased outside Rs.2 Rs.3 Rs.1
Direct Labour 1 1 2
Variable Overhead 1 1 2
Fixed overhead/unit 3 4 1
Standard Volume 10,000 10,000 10,000
Inventories (Average) Rs.70,000 Rs.15,000 Rs.30,000
Fixed Assets (net) Rs.30,000 Rs.45,000 Rs.16,000
2. Assume the same facts as stated in (1), except that the transfer price rule is as follows;
Goods are transferred among divisions at the standard variable cost per unit transferred plus a monthly
charge. This charge is equal to the fixed costs assigned to the product plus a 10% return on the average
inventories and fixed assets assignable to the product. Calculate the transfer price for product X and Y and
calculate the unit standard costs for product Y and Z.
3. The present selling price of product Z is Rs.28. Listed below is a series of possible price reductions by
competition and probable impact of these reductions on the volume of sales if Division C does not reduce
its price offering.

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Possible Competitive Price Rs.27 Rs.26 Rs.25 Rs.23 Rs.22
Sales Volume if price of Product Z is 9000 7000 5000 2000 0
maintained at Rs.28
Sales Volume if price of product Z is 10,000 10,000 10,000 10,000 10,000
reduced to competitive levels
Required:
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(a) With transfer prices calculated in (1), is Division C better advised to maintain its price at Rs.28 or to
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follow competition in each of the instances above?
(b) With the transfer prices calculated in (2), Division C better advised to maintain its price at Rs.28 or
to follow competition in each of the instances above?
(c) Which decisions are to the best economic interests of the company, other things being equal?
(d) Using the transfer prices calculated in (1), is manager of Division C making a decision contrary to
the overall interests of the company? If so, What is the opportunity loss to the company in each of
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the competitive pricing options discussed above.


Division C is interested in increasing the Sales of Product Z. A survey is made and sales increases
To

resulting from increases in television advertisement are estimated. The results of this survey are
provided below. (Note that this particular type of advertising can be purchased only in units of Rs.1,
00,000)

Advertising Rs.100,000 Rs.200,000 Rs.300,000 Rs.400,000 Rs.500,000


Expenditure
Additional volume 10,000 19,000 27,000 34,000 40,000
resulting from
additional
advertising

Required:
(A) As manager of Division C, how much television advertising would you use if you purchased product
Y at the transfer price calculated in (1).
(B) How much Television advt. would you use if you purchased Product Y at the transfer price,
calculated in (2)
(C) Which is correct from the overall company point?
(D) How much would the company lose in suboptimum profits from using the first transfer price?
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