Exercise .

• Steel: the shears have 0.4 kg of high quality steel in the final product. The
manufacturing process loses 5% of all steel put in. Steel costs Rs.4,000 per tonne(1
tonne= 1,000 kg)
• Other materials: Other materials are bought in and have a list price of Rs.3 per kg
although Hammer secures a 10% volume discount on all purchases. The shears
require 0.1 kg of these materials.
• The labour time to produce shears is 0.25 hours per unit and labour costs Rs.10 per
hour.
• Variable overheads are absorbed at the rate of 150% of labour rates and fixed
overheads are 80% of the variable overheads.
• Delivery is made by an outsourced distributor that charges Nail Rs.0.5 per garden
shear for delivery.

Required
(a) Calculate the price that Nail would charge for the garden shears under the existing
policy of variable cost plus 30%.

(b) Calculate the increase or decrease in price if the pricing policy switched to total
cost plus 10%.

(c) Discuss whether or not including fixed costs in a transfer price is a sensible
policy.

(d) Discuss whether the retail stores should be allowed to buy in from outside
suppliers if the prices are cheaper than those charged by Nail.
 Exercise 2.
MS Company Ltd. is a leading manufacturer of a certain consumer durable product.
The company has two divisions - Engineering and Assembly. The output of the
engineering division is transferred to the assembly division for further processing and
assembling before being sold to the customer as complete product. Verification of the
company’s records reveals that the variable cost per unit of the product for
engineering and assembly are Rs. 250 and Rs. 300 respectively. The fixed cost of
engineering division is Rs. 15,000 and that of the assembly division is Rs. 10,000.
The product variable cost per unit of engineering division is Rs. 400, and the total
output is 100 units which are sold to customer on completion @ Rs. 2000 per unit.If
the engineering division decides to charge its transfers to assembly division at cost
plus 150%,
.
Required:
A. what will be ABC’s overall profit and the profits of its two divisions?

B. All other things given in Exercise 2 remaining unchanged, if the engineering

division decides to price its transfers to assembly division at the prevailing
(current) market rate of Rs 1000 per unit for similar products, what is the
company’s overall profit and so also of its two divisions?

C. Other things of Exercise 2 remaining constant, if the two divisions bargain to fix
Rs. 1,150 per unit at which engineering division should price its transfers to
assembly division, what will be the profits of the two divisions that of the
company?

Exercise 3
• RJ Co. Ltd is the manufacturer of a certain electronic product. The company has three
divisions— D1 D2 and D3. Output of D1 is transferred to D2 and that of D2 to D3 for
further processing and assembling before they are passed on to the hands of the
customer as final product. The company reports that variable costs per unit of the
 product for D1 D2 and D3 are Rs. 300, Rs. 200 and Rs. 100, respectively. The fixed
costs for the three divisions are Rs. 20,000, Rs. 15,000 and Rs. 10,000 respectively.
The product variable cost per unit is Rs. 400 for division D1.If the total output of the
company for a certain period is 1,000 units, which are sold to the customer at Rs.
1,400 per unit, and if division D1 decides to charge its transfers to D2 at cost plus
120% and D2 to D3 at cost plus 110%, what is the company’s total profit and the
profits of its divisions?
• 2. All other things in numerical 1.1(above)remaining constant, if division D1 decides
to charge its transfers to D2 and D2 to D3 at current market prices per unit of Rs. 850
and Rs. 1200 'respectively, what will be the change in the profits earned by the
company and its divisions in comparison to the cost based transfer prices?
• 3. All other things in numerical 1.1(above), remaining unchanged, if the three
divisions D1, D2 and D3 of the company bargain and decide that division D1 will
charge Rs. 835 per unit on its transfers to division D2 and that division D2 will charge
Rs. 1,160 per unit on its transfers to division D3, what will be the divisions profits
under the changed situation and also the profit of the company?

Exercise 4
Thiru Ltd. manufactures a product which is obtained basically from a series of mixing
operations. The finished product is packaged in the company-made glass bottles and packed
in attractive cartons. The company is organised into two independent divisions viz. one for
the manufacture of the end-product and the other for the manufacture of glass bottles. The
product manufacturing division can buy all the bottle requirements from the bottle
manufacturing division. The General Manager of the bottle manufacturing division has
obtained the following quotations from the outside manufacturers for the supply of empty
bottles.

No. of empty bottles Total purchase value (Rs.)

8,00,000 14,00,000
1200,000 20,00,000

A cost analysis of the bottle manufacturing division for the manufacture of empty bottles
reveals the following production costs:
No. of empty bottles Total cost (Rs.)
8,00,000 1040,000
1200,000 1440,000

The production cost and sales value of the end product marketed by the product
manufacturing
division are as under:

Volume bottles of end product Total cost of end product excluding Sales value Packed in bottles
cost of empty Rs. Rs.
800,000 6,480,000 9,120,000
1,200,000 9,680,000 12,780,000

:
There has been considerable discussion at the corporate level as to the use of proper price for transfer of empty
bottles from the bottle manufacturing division to product manufacturing division. This interest is heightened
because a significant portion of the Divisional General Manager’s salary is in incentive bonus based on profit
centre results. As the corporate management accountant responsible for defining the proper transfer prices for
the supply of empty bottles by the bottle manufacturing division to the product manufacturing division, you are
required to show for the two levels of volumes of 800,000 and 1200,000 bottles, the profitability by using (i)
market price and (ii) shared profit relative to the costs involved basis for the determination of transfer prices. The
profitability position should be furnished separately for the two divisions and the company as a whole under each
method.

Discuss also the effect of these methods on the profitability of the two divisions.