Problem No 01: center which

profit produces
Following datafourare a
STAREX LTD. is a
market also.
Division Z
Each
of
product is sold in
Particulars
the external

600
A
580
B pravaolducblefsors A

priceperunit() 520
560
Market production per unit (R) 400 360
Variable cost of unit () 3 4
required per
Labour hours division Y, t
but the
Product Dcan be
transferred to maximumquantity that may
transfer is 15,000 units of D.
for
in the externalImarket are: A 16,800 units; B
The maximum sales
units:D 9,600 units 15000 units

Faper 12: Management Accounting CMA INTER

 CMAKnewledguSerins Transfer Pricing
DivisionYcan pitchase the sae roduct at a price of tho0 per unit irom outside instead
Piving transfer of product D fron Division 2
auired
Requ
dbe the traster price for each unitfor 1S,000 units ofD,ifhe total Labour hours
ein division Zare 1,20,000 hours
Walution
soluaduation ol existenceofKey Eactor
Particulars Amount Amount
Total available labour hours in Division 2 120,000
Total labour hours required to meet external narket
demandof all products:
Product A(16300x3) S0.400
Product B(15,000x4) 60,000
ProductC(13,800 x2) 27,600
ProductD (9,600x 3) 23300 1,66,800
Ves
Is Labour hours is key factor (a <by
Evaluation ofproitabilityofVarious products:
Products A() B() C(O D()
A. Market or sales price /unit 600 S60 S10
b. Less: Variable Cost/unit 520 100 360 335
BO 200 175
Contribution/unit (a-b)
4 2
d. Labour hour/unit
26.67 100 S833
e Contribution per labour hour (c/d)
Ranking (Priority) IV
15000 13800 9600
Maximum demand 16800

Determination of optimum Production Mix wvith available Labour bours:

Amount
Particulars
Total available Labour hours in Dep2. L.20,000
Less: Allocated for maximum production of
Product C-(13,800x 2) (27,600)
Product D (9,600 x 3) (28,800)
Product B(15,000x4) (60,000)
3,600
Available labour hours for production of product A
1.200 Units
Possible production of Product A(3,600 /3)
departmentaltransferand Opportunity Cost:
Resource Movemnent for Inter
iv
hours required for transter of 15,000 units of product Dto
a. Total labour unit 45,000 Hours.
divisionY= 15,000 units x 3 hours per market demand. Now
hours not sufficient to meet
b. Presently available labour should move the resource from existing
product Ywe
for manufacturing profit-making products.
production ie. from least

43
CMA INTER
Paper 12. Management Accounting
 DL beSeres rom produet
moved

A
k0
Pect D
hours should be

200 heurs
should be AMamanunfutacaCtuturirnineg l
moved from Product B

(3,600 x 26.67)
(41.400x
opportunitycost
Tcal Iransfer Price to be
quoted
dforone AS)
CalelatioR e Minimum 199
wnit ofProdun
Partilars
Varabie Cast per
ASt Opprtunity cust
unit of Product
per unitef
D
product
D(19,59,012/150003
per one unit
Nmew
Price to be quoted
Tramser 130
Preblem No 82
prtactiat has two divisions Xand Y. Division Xis
mainlyand seln
company device and Division Ypacks and labels the product
of an eletronic
A6D1751A
Amanfaturing
Division Xsupplies 25,000 units of the
product per month to Y
for engaged
fixedpackcosa12%gtia
the market variable cost for the product and
and labelingDivision Xincurs tl6 as the
per year. Investment in fixed assets is 9,60,000. The division plans to have
tS40000 profits
on fved assets as normal packaging and
Diision Yincurs 10 per product as variable expenses tor Division
L Find the Transtfer Price per unit of the
product that Xcan
marketing ranster
charge for
AWhat will be profit of Division Yif it can sell all the productssin the market at
nit?
aHDiision Ycan sell only 15,000 units of the product per month and asks Divie
to supply only 15,000 units, what will be the effect on the Transfer Price and
profits af the divisions?
Solution:
Compytationof Transfer Price to be charged by N' to Y:
Particulars Amount
a Variable Cost per Unit 16.00
& Faed Cost per Unit 2.80
840,000/3,00,000)
c Return per unit 0.384
(25000 pm r 12m)
e Total a+b-c)
19.184
(Computation of Profit of Division Y
2 Transter price

c
Variable Cost 19.184
Total (a +b) 10.000
29.184
 KnowlodgaSeries
Pw
unit Transfer Pricing
priceper
eling
Dvistony
Contribution& Proit
0,00
c)
(d-
unit
per
50.816
AMonthly
prolit
(25,000
d) t12,70,400
B)Yearlyprofit
300,000xd) 152,44,800
TALsterPriceimonthly
i
demandis only 15.000
Particulars
Unit
Variable Cost per 16.00
Fixed Cost per Unit
(8,40,000/1,80,000)
Add: 4.67
Returnperunit
0.64
060,000x12%)/1,80,000
Total(atb+c) 21.31
&
ariable Cost for Packaging 10.00
Marketing
Total(d+e) 31.11
Contribution &Profit per unit 48,69
(80-)
ProblemNo03: J17
two
A
Companyhas divisions, manufacturing and assembly. At a normal volume of 250,000
componenttYPY per year, productioncosts per unit are:
sof
Particulars Amt in
DirectMaterials 40
DirectLabour 20
Variable Factory Overhead 12
Fixed Factory Overhead 42
114
Total
manufacturing division has been manutacturing and selling 2,50,000 components per
The each. However, the division can manufacture 350,000
r tn outside buyers for 136
buying the components from outside
amponents per year. The assembly division has been offered to purchase 90,000 units of
division has
suppliers for {130 each. The assembly division at the rate of 104 per unit. Should the
component YPY from the manufacturing offer? Will an internal transfer be of any
Division accept the
manager of Manufacturing
benefit to the company?
Solution:
manager should accept. As there is surplus capacity, the
I Manufacturing Division the VC, Le, 72 per component
the division is
relevant costs to
Margin to the Manufacturing Division would be- =
Contribution
L The increased
90,000 x(R 104 - 72) =t 28,80,000.
 CMAKnowledgeSeries with an internal transfer
betteroff

comnpany
Thecomponents
tor would
wouldbe
that
save
90,
coulad be
made internally
000 x(130
-72)
for
CAXFTenY
G2,20,in0cr00ementper ayear
l co
company eprices for
transfer its products on
interdeivisional divisions.Th the
relevant particulars
sobasfthe
ProblemNo04: its belose. s
the investient ngiven
fixes
Ltd returnon 2020-21
is Amount
Co
MLestimated the year 6,00,000
anDivisionNfor 3,00,000
the
|Particulars bank)
cashat 1,00,000
Assets fotherthan
FixedA 9,00,000
CurrentAssetss
Cashatbank division 10
forthe
fixvedcostunit year(inunits) 5,00,000
Yearly per production per 30%
Variablecost
volumeof
Budgeted oninvestment priceper._
return transfer
|Desired minimum
Solution:
showing
calculation of Amount Amount
Statement 10.00
Particulars
per unit 9,00,000, 1.80
Variablecost
Cost per unit 5.00.00
Add:Fixed 11.80
unit (i+ii)
Totalcostper
Desired profitper unit:
Add: division 10,00,000
investmentin the1,00,000)
Total 3,00,000 + 30%
(6,00,000+ investment %
3,00,000
Desired return
on
(10,00,000 x 30%)
desired return
Amount ofProduction in units
5,00,000
Budgeted (3,00,000/5,00,000) 0.60
unit
Desired Profit per Price per unit (itiv) 12,40
V.
Minimum Transfer

Problem No 05:
variable overhead costs are 125, 150 and to
Material Cost, Labour cost and 20,000 units are 6,40,000 and required rate
respectively. If the fixed expenses for
find out the transfer price per
unit.
is 25% on transfer price, then
Solution:
price per unit:
Statement showing calculation of minimum transfer Amount Amount
Particulars 125
i Material Cost per unit
ii. Labour cost per unit 150
Variable overhead per unit 50
iv. Fixed cost per unit 6,40,000 32
20,000
Total Cost per unit (i+ii+iitiv) 357
vi. Add: Desired profit @ 25% on
transfer Price 119
 MA Kewiedge Seriey

25) Iransfer Pricing

Minimum
Transfer Price per
blemNo06: unit[vevi) 476
17Ldwhich has a system of assessment of
ome divisions divisional
Division Alfa and Divise D16
nufacture I5,000
,000
has idie capacity performance on the
numbers of a special vision BetathatDivit Alfa has hass Capacity to
sof residual
budeted
he relevant residual income of Div Beta is component sells to outside Customers
oher details extracted from the 120Lacs and that of
Allews: Division Aifa is 100 Lacswere
budget of Division Alfa for
Particulars the current year
(Outside Customers) Amount (
Jariable cost per unit
Dvisional Fixed Cost
12,00,000
60
units @180 per unit
Capitalemployed 80,00,000
Cost of Capital 750,00,000
s iust 129%
pivy Beta hasby received a special
order for
ones made Div Alfa Fully aware of the idle which it requires components similar to the
Alfa to qauote for manutacture and supply capacity Div Alfa, Div Beta has asked Div
of
fcation during the final 300,000 numbers of companents with a
an extra variable costtof Rs 5processing
per unit Diy. siigt
and Div Beta agree that this will invalve
g ecalculate the transfer price, which alfa should quote to beta to achieve its
residual income budgeted
If beta can buy the required components from open
market at a price of t T0
(Situation A). 172 (Situation B), or 160 (situation C), what should be its automous
decision: buying from market at market price or buving from alfa at the transter
price, in each of the situations? Also state with reason in what situation the decision
of Beta may result in a sub-optimal decision for the company as a whole?
lution:
LCalculation of minimum transfer price per unit to be quoted by Alpha to meet
residual income target:
Particulars Amount?
Variable Cost per unit 160

Add: additional variable cost per unit as mutually agreed for

modifications
Total relevant cost per unit 165
Add: Desired profit per unit to meet residual income target (ref Note 01) 10

Minimum Transfer price per unit to be quoted to Beta Division 175

Note 01: Calculation of desired contribution per unit on transfer to Beta:

Amout!
Particulars
180
a) Selling price per unit
(160)
b) Less: Variable cost per unit

CMA INTER 47
rl2 Management Accaunting
 cstoerg
exteral
of
t

fxrdcost
(7501 lacs
alta divsion 125)
egyed e-h
capital extenalsales
ef defrom alfa (1DO lacs-7O lacs)
lessCoit
ncome target of
N ncome
aBesa
res
l
transferredtoBeta
in transferred to Beta )
Shorta l t
unitstobepeeach unit
of
Numbercontributien
of Beta
Desired autonomous decision
0 yof
optimality Situation-a
showving
Situation-A
Statement

Sihuations
DecisionofBeta 175
perunit Buy from market
Marketprice Buy from Alfa
Transfer price
(lower of the
Beta'sdecision
teo prices I65
165
DecisionofCompany
dvisional
companyfor 172
Castto
(varable cost only)
transfer
for buying
Cost to company Buy from Alfa Buy froma
from market Buy from Alfa
decision for the
Minimum cost
company
Optimality of Decision by
Optimal Sub-optimal (as for
Beta:
Optimality of Decision of Beta buying from Optima
Vs Decision by Company market company
suffers extra cost
of t7)

Problem No 07: D13

GREEN ENVIRON LTD,has two divisions-M and N. Division-M manufactures product A-15
which it sels in outside market as well as to Division-N which processes it to manutacture
Z25. The Manager of Division-N has expressed the opinion that
The two Divisional Managers are about to enter into transfer price is too high.
Manager of Division-M to supply him with some discussions resolve the contlict and
to
information prior to discussions.
 EeetgeSeriey

h aheen
elling ,om nits tn Transfer Pricing
sl
anticipate that theseoutsidees
the ved costs are t3akh deand
and 106o0 units to
will change The ivi a
on
IHvisn Mantlipates
A
Divisionat
that Divisioninvestment n ets ivriaile c t
t1Z takhs
M N.t40000 fixed eosts and
w
t sellto of want a
of DIVisio would have no eontrol t2.00,000 of asets cantransfer priee of t22 H
iserjdeedprinm
rimarily on his rate of return over the proceeds from the besaleavotded of the
e Manager
Shouldthe of
Division Mtransfer its
Whatisthe lowest
the Division M products at t22 to Division-N
price that
comparativeProfitability
should accept
Partkewlars Statement
Sell 0 ofDivision
25
M
SalesRevenue pu Sell 22 pu Don't Transfer
Sales (50,000 units x t 25)1
7hansterto Division-N 12,50,000 12,50,000 12,50,000
2,50,000 2,20,000
Total (10,000x 25) (10,000 x22)
TotalCost: 15,00,000 14,70,000 1250,000
ariable Cost (at 15/ unit) 9,00,000 9,00,000 750,00o
FixedCost
(60,000 x15) (60,000 x 15) (50,000 x15)
3,00,000 3,00,000 2,60,000
TotalCost
division 12,00,000 12,00,000 10,10,000
Totalprofit of the 3,00,000 2,70,000
(a-b) 2,40,000
Total assets employed
Returno investment % (cld)
12,00,000 12,00,000 10.00,000
25%
mment: The manager of Division Mshould not agree to sell 22.50% 249%
at 22 per unit, as it lowers
eiWnits rate freeturn
of (ROI) i.e. (25%oto 22.50%)
Calculation ofloWest -transfer price acceptable to Division M:
The lowest transter price acceptable to Division Mis one, which maintains its rate of
return of 24% (ROl without selling to Division N)
(TotalIsales
ROI% = revenue-Total Cost)
Total assets
0.24 =
(12,50,000+10,000 x-12,00,000)
12,00,000
0.24= s0,000+10,000 x)
12,00,000

2,88,000= 50,000 + 10,000x

2,38,000 = 10,000x
X= 38,000
= 23.80 per unit
10,000

-lem No 08: D 18
npany is organized into two divisions, namely Xand Y, and produces three products A,
|C. Data per unit are:
1culars A B C

12 Management Accounting CMA INTER ~4.9

 CNAKnOWeaguSeries 240 230 200
168 120 140
Market rice
()
onsts( 1.600 1,000 600
hirvxt
cielahours
Yhas a(hours)
1ariablec demand
mtialfor o00 units of produer for its use. If Division y Cann
(units)
les Potento
evuinement, DivisionYcanbuy a similar product from marker at Rs.ZZA per sie

units ofB3for Division Y, if the

the
Requshouldbethe Xare
transterprice
of 600
restrictedto
15.0002
(otal direct le
LEaluationDivision
What ofprofitabilityy oftheproducts:
avallablein
hours
SolutionE
240 230 200
Particulars 168 120 140
a) Marketprice 72 110 60
Variablecosts
b) Less: (a-b) 5
ContributionPer unit
4

laborhoursperunit hour (c/d) 18 22 20

d) Direct directlabor
Contributionper
e)
Rank
Production Mix:
ofoptimum
Determination Production Hours used Balance hours
Max. Sales Hrs/Unit 5000
Production
1000
5 1000
600 1800 10000
8200
600 1600 6400
1600 Department X= 1,800 hours
1800
available in
Note 01: Surplus labour hours
per unit:
Calculation of miimum Transfer
Particulars Amount
Total variable cost (600 Units x120 per
Add: Opportunity
unitD
Cost (600 units x 5 hours)- 1,800) x 18
(contribution 72,21,060000
|lost on stoppage of production of product Aper hour)
Minimum transfer price for 600 units to be charged 93,600, 93,600
Minimum Transfer price per unit of product B to be charged ( 156

Problem No 09:
J12
Your company fixes the inter-divisional transfer prices for its products on the basis of cost
plus areturm on investment in the division. The Budget for
as under Division A for 2011-12 appears
Particulars
Fixed assets
Current assets 5,00,000
Debtors
Annual fixed cost of the
3,00,000
2,00.000
Variable cost per unit of Division 8,00,000
product
10
 CMA Knowledge Series Transfer Pricing

Budgeted Volune 4,00,000 Units per year

Desired ROI 28%
termine the transfer Price for Division A
Dete
Solution:
CalculationofMinimum Transfer Price per unit to be qugted
Particulars Amount (
Variable cost 10.00
0.000
Fixed cost per Unit 2.00
20000
Total Cost per unit
Add: Required Return per unit(0,000 x28 0.70
4,00,900
Minimum Transfer Price to be charged per unit 12.70