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MCS Case 6 1 Transfer Pricing Problem Vikram v1.0

1) The document presents three problems calculating transfer prices for products X, Y, and Z between divisions of a company. 2) In problem 1, the transfer price is calculated as standard cost plus a 10% return, yielding prices of $8, $17.60, and $23.60 respectively. 3) Problem 2 calculates transfer prices in the same way using additional variable and fixed cost information, resulting in the same prices. 4) Problem 3 evaluates whether division C should maintain its $28 price or match competitors, finding that maintaining its price maximizes profits for the company.

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Vikram Vijayant Rana
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261 views4 pages

MCS Case 6 1 Transfer Pricing Problem Vikram v1.0

1) The document presents three problems calculating transfer prices for products X, Y, and Z between divisions of a company. 2) In problem 1, the transfer price is calculated as standard cost plus a 10% return, yielding prices of $8, $17.60, and $23.60 respectively. 3) Problem 2 calculates transfer prices in the same way using additional variable and fixed cost information, resulting in the same prices. 4) Problem 3 evaluates whether division C should maintain its $28 price or match competitors, finding that maintaining its price maximizes profits for the company.

Uploaded by

Vikram Vijayant Rana
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Vikram Rana, PDM-03-027

Case 6-1
Transfer Pricing Problems

Problem 1: Calculate the transfer price for Product X and Y and the
standard cost for Product Z.
a. For Product X:

Standard cost = Material Purchased Outside + Direct labor + Variable overhead + Fixed
overhead per unit
= $2.00 + $1.00 + $1.00 + $3.00
= $7.00

10% return on inventories and fixed assets = 0.1 [(30,000+70,000)/10,000] = $1.00

Transfer price = standard cost + 10% return on inventories and fixed assets
= $7.00 + $1.00
= $8.00

b. For Product Y:
Standard cost = Material Purchased Outside + Direct labor + Variable overhead + Fixed
overhead per unit + transfer price of X
= $3.00 + $1.00 + $1.00 + $4.00 + $8.00 = $17.00

10% return on inventories and fixed assets = 0.1 [(15,000+45,000/10,000] = $0.6

Transfer price = standard cost + 10% return on inventories and fixed assets
= $17.00 + $0.6
= $17.6

c. For Product Z:

Standard cost = Material Purchased Outside + Direct labor + Variable overhead + Fixed

overhead per unit + Transfer price of Y


= $1.00 + $2.00 + $2.00 + $1.00 + $17.6
= $23.6
Vikram Rana, PDM-03-027

Problem 2: Calculate the transfer price for Product X and Y and the
standard cost for Product Z (with additional information)

a. For Product X:

Standard variable cost = Material Purchased Outside + Direct labor + Variable overhead

= $2.00 + $1.00 + $1.00 = $4.00

Monthly charge = fixed costs +10% return on inventories and fixed assets
= $3.00 + 0.1 [(30,000+70,000)/10,000]
= $4.00

Transfer price = standard variable cost + monthly charge


= $4.00 + $4.00
= $8.00

b. For Product Y:

Standard variable cost = Material Purchased Outside + Direct labor + Variable overhead +

Transfer price of X
= $3.00 + $1.00 + $1.00 + $8.00
= $13.00

Monthly charge = fixed costs + 10% return on inventories and fixed assets
= $4.00 + 0.1 [(15,000+45,000)/10,000]
= $4.60

Transfer price = standard variable cost + monthly charge


= $13.00 + $4.60
= $17.60

Unit standard cost = Variable cost + Fixed cost = $13.00 + $4.00 = $17.00

c. For Product Z:

Standard variable cost = Material Purchased Outside + Direct labor + Variable overhead +

Transfer price of Y
Vikram Rana, PDM-03-027

= $1.00 + $2.00 + $2.00 + $1.00 + $17.6


= $23.60

Problem 3 Lambda Company (with additional information)

Questions and Answer:

a. With transfer price calculated in Problem 1, is Division C better advised to


maintain its price at $28.00 or follow competition in each of the instances
above?

Under possible competitive price $27.00


If company maintain the price at $28.00, the profit = (28-23.6) 9,000 = $39,600
If company follow the possible competitive price at $27.00, the profit = (27-23.6)
10,000 = $34,000
Under possible competitive price $26.00
If company maintain the price at $28.00, the profit = (28-23.6) 7,000 = $30,800
If company follow the possible competitive price at $26.00, the profit = (26-23.6)
10,000 = $24,000
Under possible competitive price $25.00
If company maintain the price at $28.00, the profit = (28-23.6) 5,000 = $22,000
If company follow the possible competitive price at $25.00, the profit = (25-23.6)
10,000 = $14,000
Under possible competitive price $23.00
If company maintain the price at $28.00, the profit = (28-23.6) 2,000 = $8,800
If company follow the possible competitive price at $23.00, the profit = (23-23.6)
10,000 = ($6,000)
Under possible competitive price $22.00
If company maintain the price at $28.00, the profit = (28-23.6) 0 = $0
If company follow the possible competitive price at $22.00, the profit = (22-23.6)
10,000 = ($16,000)

So, no matter how much is the possible competitive price, when the company maintain its
price at $28.00, it can get more profit than follow the possible competitive price.

b. With the transfer prices calculated in Problem 2, is Division C better


advised to maintain its present price at $28.00 or to follow competition in
each of the instances above?
Vikram Rana, PDM-03-027

Because the answer to the Problem 2 is the same as the answer to the
Problem 1, so the answer to this question is the same as the question 3 (a).

Maintaining the price at $28.00, the company can get more profit.

c. Which decisions are to the best economic interests of the company, other
things being equal?

From the question 3 (a) and 3 (b), no matter which method the company use to calculate the
cost, when the company maintains the price at $28.00, the company can maximum the profit.

d. Using the transfer prices calculated in Problem 1, is the manager of


Division C making a decision contrary loss to the company in each of the
competitive pricing actions described above?

No. The goal to the company is maximum its profit, and as our calculated, when the
company maintains its price at $28.00, it can get the most profit, so the manager has acted in
the best interest of the company.

If the company follows the competitive price, the opportunity losses are shown as followed:
1. The possible competitive price is $27.00, opportunity loss = 39,600-34,000 = $5,600
2. The possible competitive price is $26.00, opportunity loss = 30,800-24,000 = $6,800
3. The possible competitive price is $25.00, opportunity loss = 22,000-14,000 = $8,000
4. The possible competitive price is $23.00, opportunity loss = 8,800-(-6,000) = $14,800
5. The possible competitive price is $22.00, opportunity loss = 0-(-16,000) = $16,000

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