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The cost per unit of the part is as follows: Variable Cost= 15 Fixed Cost= Total= 5 20 (based on full capacity)
Only 1, 50,000 units of the part are expected to be sold during the coming year to external customer for @ Rs 29/- per unit. Division II has been buying the same part from an external supplier for Rs 28/- per unit. The manager of Division II has offered to buy 50,000 units from Division I for Rs 18/- per unit. On the basis of above information a) Determine the minimum TP that Division I is to accept. b) Should an internal transfer take place? Why? c) Should Division I agree to transfer the 50,000 units for Rs 18/- each? Explain. Solution: Division 1 has two options 1) Accept the offer of division 2 and Sales 50000 unit to division 2 and rest 150000 unit to outside market 2) Not accepting the offer of division 2, and in that case only sale of 150000 unit to outside market
Accept the offer (as offer price greater than cost price)
Revenue= 50000*18+150000*28 (as the market is competitive the division 1 sell the unit at maximum Rs. 28 to the market) =5100000 Less: VC 15*200000=3000000 Less: FC 5*200000=1000000 Profit = 1100000
Reject the offer Revenue =1500000*28=4200000 Less: VC 1500000*15=2250000 Less: FC 1000000 Profit= 750000
a)
if division 1 accepts TP at variable cost i.e. Rs 15 and transfer 50000 unit to division 2, in that case division 1 profitability will remain un
however it will help to augment division 2s profitability as it will able to procure the same part at Rs.15 instead of Rs 28 from the market companys goal congruence will be maintained . b) i) Transfers should take place due to the following reason Division 1 produces 2 lk unit whereas its market demand is 1.5 lk, so if div 1 would not accept the offer of div 2, it would result in the
of 50000 unit.
ii) iii)
If div 1 transfers 50000 units to div 2 at any price at or above the VC its profitability will not be affected. Internal transfer is preferable in industry due to less probability of bad debt , certainty of supplies, good inter divisional relation etc. c) Calculation shows that if div 1 agrees to transfer 50000 units to div 2 at the rate Rs 18, it yields a profit. So div 1 should agree.
2 .In a manufacturing company, Div A produces a part is used in the finished product of Division B. Variable Cost= 40 Fixed Cost= Total= 10 50
This part can be sold in highly competitive market for Rs 70/- per unit. The selling price of the finished product of Division B is Rs 200/- per unit, and it has to incur a variable cost of Rs 100/- per unit. At present, Division B buys the total output of Division A at a negotiable price of Rs 65/- per unit, but because of over emphasis on divisional welfare than company welfare; a new TP method must be developed. As suggestion was to add 35% to the total cost of the part when transferring to Division B. Another suggestion was to use the variable cost of Rs 40/- per unit in arriving at a transfer price. On the basis of above information, determine the TP of finished goods per unit for Division B, according to different TP method. Solution:
FOR 1 UNIT PRESENT DIV I TP 65 TOTAL COST (40+10) 50 PROFIT 15 DIV II SP 200 COST (100+65)165 PROFIT 35 TOTAL PROFIT (15+35)=50 EXPLANATION: TP FIXED AT 135% OF (40+10)= 67.5 DIV I DIV II TP 67.5 SP 200 TOTAL COST COST (40+10) 50 (100+67.5)167.5 PROFIT 17.5 PROFIT 32.5 TOTAL PROFIT (17.5+32.5)=50 TP FIXED AT 135% OF VC, I.E. 54 DIV I TP 54 TOTAL COST (40+10) 50 PROFIT 4 DIV II SP 200 COST (100+54)154 PROFIT 46
3.A company has two divisions-A & B, which produce 3 products K,L and M as follows:-
Product Market Price Variable Cost Direct Labor Hour Max. sales potential (units)
K 120 84 4 1600
L 115 60 5 1000
M 100 70 3 600
Division B has a demand for 600 units of L for its use. If Division A cant supply as per requirement, then B can buy a similar product from market @ Rs 112/- per unit. What would be the TP of 600 units of L for Division B, if the total direct labor hour available in Division A is restricted to 15000?