Question 13: Mangwiro Ltd

a) Calculations to indicate the increase in the monthly profits of Mangwiro Ltd., if the
new customer’s offer is accepted.

Before offer accepted When offer accpeted Change

Uhuru Chopa Total Uhuru Chopa Total
Revenue
External Sales : Regular 150,000 200,000 350,000 140,000 200,000 340,000 (10,000)
External Sales : New offer - - - - 55,500 55,500 55,500
Internal Sales: Regular 100,000 - 100,000 100,000 - 100,000 -
Internal Sales: New offer 30,000 - 30,000 30,000
250,000 200,000 450,000 270,000 255,500 525,500 75,500
Production Costs - - -
Own costs: Variable costs (175,000) (90,000) (265,000) (189,000) (117,000) (306,000) (41,000)
Transfer costs - (100,000) (100,000) - (130,000) (130,000) (30,000)
(175,000) (190,000) (365,000) (189,000) (247,000) (436,000) (71,000)
- - -
Profit 75,000 10,000 85,000 81,000 8,500 89,500 4,500

Therefore, accepting new customer offer will increase Mangwiro Ltd’s monthly profit to
increase by $4 500.

b) Calculations to indicate whether the existing transfer pricing arrangements would

motivate each of the two divisions to cooperate in transferring the 300 subcomponents
needed in order to manufacture the new customer’s order.

Per unit Total = 300 units

Uhuru Chopa Uhuru Chopa
Selling price 100 185 30,000 55,500
Production Costs - -
Variable costs (70) (90) (21,000) (27,000)
Transfer costs - (100) - (30,000)
(70) (190) (21,000) (57,000)
Profit/ (Loss) 30 (5) 9,000 (1,500)
- Uhuru Division would gain profit by transferring the subcomponents at the current
transfer price ($100) because of increase in sales volume (300 units).
- Chopa Division would lose profit by accepting the new customer's order since the
selling price ($185) is less than total cost ($190), resulting in $(5) loss per unit.
- Therefore, the existing transfer pricing arrangements would not motivate Chopa
Division to cooperate.
c) Identify the minimum transfer prices which would be acceptable to Uhuru Division
and
identify the maximum transfer prices which would be acceptable to Chopa Division.

Minimum Transfer Price

 The minimum transfer price is the sum of the supplying division's marginal
cost and opportunity cost of the item transferred.
Minimum transfer price ≥ Variable cost per unit + Total contribution margin on lost sales
Number of units transferred
Minimum Transfer Price for Uhuru Division:
Minimum acceptable price = $70/unit + 100units ($100-$70)
1300units
= $70 + $2.30
= $72.3
Maximum transfer price
 The maximum transfer price is the lowest market price at which the receiving
division could purchase the goods or services externally, less any internal cost
savings in packaging and delivery.
Maximum Transfer Price for Chopa Division:
If the external supplier doesn't exist, transfer price should be less than or equal to
profit to be earned per unit sold (not including the transfer price):
Maximum acceptable price = Selling price - Additional variable cost
= $200/unit - $90/unit
= $110/unit.

Then, suggest a transfer price per unit for the 300 subcomponents which would
achieve the following:
_ the incremental profits from doing business with the new customer are to be shared
equally between the two divisions.
_ The same transfer price per unit is to apply to all units transferred.
Suggested Transfer Price
Sharing Incremental Profit Equally:
Total incremental profit = $4,500
Each division's share = $4,500 / 2 = $2,250
Transfer Price Calculation:
Let T be the transfer price per unit.
Increased profit for Uhuru = 300 units * (T - $70) = $2,250
Solving for T: T = $77.5
Therefore, a transfer price of $77.5 per unit would achieve the desired goals of
sharing incremental profit equally and using the same transfer price for all units.