Case-study 6-1 : Transfer Pricing

Illustration .I .

6 .000+70.6 Transfer price=17+0.1×[( 15.Solution : Lambda Company For Product X • Standard cost = Material Purchased Outside+ Direct labor +Variable overhead+ Fixed overhead per unit • =2+1+1+3=7 10 percent return on inventories and fixed assets=0.000)/10.000)/10.000+45.1×[( 30.6=17.000]=1 Transfer price = 7+1 = 8 For Product Y Standard cost= Material Purchased Outside+ Direct labor +Variable overhead+ Fixed overhead per unit+ Transfer price of X • =3+1+1+4+8=17 10 percent return on inventories and fixed assets=0.000]=0.

6 .6=23.• For Product Z: Standard cost= Material Purchased Outside+ Direct labour +Variable overhead+ Fixed overhead per unit+ Transfer price of Y =1+2+2+1+17.

II .Illustration .

6 Unit standard cost = Variable cost+ Fixed cost = 13+4=17 Transfer price= 4+4=8 .000+45.000]=4.6 Transfer price=13+4.000]=4 For Product Y • Standard variable cost =Mat Purchased Outside+ Dir lab+VOH+ Transfer price of X =3+1+1+8=13 Monthly charge=FC+ 10 percent return on inventories and FA =4+10%×[(15.000) /10.Lambda Company (with additional information) For Product X • Standard variable cost =Material Purchased Outside+ Direct labor +Variable overhead =2+1+1=4 Monthly charge=fixed costs+10 percent return on inventories and fixed assets =3+0.000+70.1×[(30.Problem 2 .6=17.000) /10.

6=23.• For Product Z: Standard cost =Material Purchased Outside+ Direct labor +Variable overhead+ Fixed overhead per unit+ Transfer price of Y=1+2+2+1+17.6 .

Illustration : III .

000 .00 If company maintain the price at $28.000=34.000=24. the profit= (26-23.6) ×9.000=39.800 If company follow the possible competitive price at $26. the profit= (27-23.6) ×10. the profit=(2823.6) ×7.Solution Under possible competitive price $26.6) ×10.600 If company follow the possible competitive price at $27. the profit=(28-23.000=30.00 • If company maintain the price at $28.000 Under possible competitive price $27.

000 If company follow the possible competitive price at $25. the profit=(28-23.000=22. the profit=(28-23.6) ×2.000 Under possible competitive price $23.000=-6.6) ×10.800 If company follow the possible competitive price at $23.00 If company maintain the price at $28.000 . the profit= (23-23.000=14. the profit= (25-23.000=8.00 If company maintain the price at $28.Solution Under possible competitive price $25.6) ×5.6) ×10.

00 If company maintain the price at $28.6) ×0=0 If company follow the possible competitive price at $22.000=-16.Solution • Under possible competitive price $22.000 . the profit =(28-23. the profit = (22-23.6) ×10.

800 3. The possible competitive price is $23. the opportunity losses are shown as followed: 1. opportunity loss=22.00.800 5.00.000)=16. The possible competitive price is $26.00. opportunity loss=30.000-14.000 4.000)=14. opportunity loss=8. 2.00.600 2.800-24.600-34.000 . The possible competitive price is $25. The possible competitive price is $22.00.Summary : Comparison between the options If the company follows the competitive price.000=6.800-(-6.000=8. The possible competitive price is $27. opportunity loss=0(-16.000=5. opportunity loss=39.

. when the company maintain its price at $28. it can get more profit than follow the possible competitive price.Further Questions and Answers a) With transfer price calculated in problem 1.So.00. no matter how much is the possible competitive price. is division C better advised to maintain its price at $28 or to follow competition in each of the instances above? Answer.

Because the answer to the Problem 2 is the same as the answer to the Problem 1. is Division C better advised to maintain its present price at $28. . Maintaining the price at $28.00 or to follow competition in each of the instances above? Answer.00. so the answer to this question is the same as the question 3 (a). the company can get more profit.b) With the transfer prices calculated in Problem 2.

c) Which decisions are to the best economic interests of the company. the company can maximum the profit. no matter which method the company use to calculate the cost.00. when the company maintains the price at $28. other things being equal? Answer.From the question 3 (a) and 3 (b). .

No.d) Using the transfer prices calculated in Problem 1. it can get the most of profit. The goal to the company is maximum its profit. so the manager has acted in the best interest of the company. .00. is the manager of Division C making a decision contrary loss to the company in each of the competitive pricing actions described above? Answer. when the company maintains its price at $28. and as per calculation.

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