Required no. a)
L limited:
i) Monthly profit - at Present Level:
Sales (10,000 drums at Rs. 20 per drum) 200,000Less: Cost of Sales:a) Direct material (10,000 drums x Rs. 9) 90,000b) Other Cost (10,000 drums x Rs. 3) 30,000Total variable cost (120,000)Contribution Margin 80,000Less: Fixed cost (40,000)
Net Profit 40,000
Calculation of Sales - Drum by L ltd.:
M Ltd. Sales 750,000 ltrs during the month. L ltd purchase 1/3 of M ltd. SalesTherefore L ltd. Purchase = 750,000 x 1/3250,000 ltrsPacking of material in 25 ltrs drum, therefore, L ltd purchaseDrum = 250,000 ltrs / 25 ltrs per drumDrum = 10,000 drums.There is no ending Finished goods and WIP therefore the purchase drum 10,000 druis sold by L ltd. During the month.
M limited:
i) Monthly profit - at Present Level:
Sales (750,000 ltrs x 0.36) 270,000Less: Cost of Sales:a) Variable cost (750,000 ltrs x 0.2) (150,000)Contribution Margin 120,000Less: Fixed cost (60,000)
Net Profit 60,000
Calculation of Sales price per unit: Calculation of Variable cost per unit:
Sales Price = Rs. 9 per 25 ltrs Variable cost = Rs. 200 per 1,000 ltrsSales Price = 0.36 Variable cost = 0.20
L
limited:
i) Monthly profit - at REVISED Level:
Sales (18,000 drums at Rs. 16 per drum) 288,000Less: Cost of Sales:a) Direct material (18,000 drums x Rs. 9) 162,000b) Other Cost (18,000 drums x Rs. 3) 54,000Total variable cost (216,000)Contribution Margin 72,000Less: Fixed cost (40,000)
Net Profit 32,000
Calculation of Sales - Drum by L ltd.:
Drum = 10,000 drums.Plus: Extra Drum = 8,000 drumsTOTAL DRUM PURCHASE = 18,000 drum.
M limited:
i) Monthly profit - at Present Level:
Sales (950,000 ltrs x 0.36) 342,000Less: Cost of Sales:a) Variable cost (950,000 ltrs x 0.2) (190,000)Contribution Margin 152,000Less: Fixed cost (60,000)
Net Profit 92,000COMPARATIVE ANALYSIS:
L limited M Limited GroupProfit - at present level 40,000 60,000 100,000Profit - at revised level 32,000 92,000 124,000
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Transfer Pricing Examples - Colin Chap 21
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