1.

Division of Aparna Company manufacturers product A, which is sold to another division as a component of its product; which is then sold to the third division C , which is ultimately sold by division C to outside market. Intra company transfer rule- standard cost plus a 10% return on fixed assets and inventory to be paid by the buying division. Std. cost per unit Purchase of outside material Direct labour Variable overhead Fixed overhead per unit Average inventory Net fixed assets Standard production Product A 40 20 20 60 14 lacs 6 lacs 2 lacs units Product B 60 20 20 60 3 lacs 9 lacs 2 lacs units Product C 20 40 40 20 6 lacs 3.2 lacs 2 lacs units

a) Determine from the above data, transfer prices for Product A, B and standard cost for Product C? b) Product C could become uncompetitive since upstream margins are added. Comment. Answer: Transfer price of Product A: Standard production = 2 lacs units Outside material purchase cost = 40 X 2, 00,000 = Direct labour cost = 20 X 2, 00,000 = Variable overhead cost = 20 X 2, 00,000 = Total 10% return on fixed assets and inventory= 0.1 X (14 + 6) = Total transfer price Transfer price per product = 1, 62, 00,000 / 2, 00,000 = Rs 81 Transfer price of Product B: Standard production = 2 lacs units Outside material purchase cost = 60 X 2, 00,000 = Direct labour cost = 20 X 2, 00,000 = Variable overhead cost = 20 X 2, 00,000 = Total 10% return on fixed assets and inventory= 0.1 X (3 + 9) = Rs. 1,20, 00,000/Rs. 40, 00,000/Rs.40, 00,000 Rs. 2, 00, 00,000 Rs. 1, 20,000 Rs. 80, 00,000/Rs. 40, 00,000/Rs.40, 00,000 Rs. 1, 60, 00,000 Rs.2, 00,000 Rs. 1, 62, 00,000

Total transfer price Transfer price per product = 2, 01, 20,000 / 2, 00,000 = Rs 100.6

Rs. 2, 01, 20,000

(Note: While computing transfer price fixed cost is not considered) Standard cost of product C: Standard production = 2 lacs units Outside material purchase cost = 20 X 2, 00,000 = Direct labour cost = 40 X 2, 00,000 = Variable overhead cost = 40 X 2, 00,000 = Fixed overhead cost= 20 X 2, 00,000 units = Total Cost per unit = 2, 20, 00,000 / 2, 00,000 Rs. 40, 00,000/Rs. 80, 00,000/Rs.80, 00,000 Rs 20, 00,000 Rs. 2, 20, 00,000 =Rs 110/-

b) While calculating the cost of product C, margins of product A, which is an input to Product B, which in turn becomes an input to Product C are added. Finally when the product is sold in the market, it may be priced more than the competitors product. Another possibility is to reduce the margins added by Products A and B, and lower pricing the Product C