CHINHOYI UNIVERSITY OF TECHNOLOGY

SCHOOL OF ENTREPRENEURSHIP AND BUSINESS SCIENCE

DEPARTMENT OF ACCOUNTING

NAME: JOY BEN

STUDENT REGISTRATION NUMBER: C20141678S
QUESTION NUMBER 13 – TRANSFER PRICING
 INTRODUCTION
TRANSFER PRICING REFERS TO THE PRICES OF GOODS AND SERVICES THAT
ARE EXCHANGED BETWEEN COMPANIES UNDER COMMON CONTROL .

IT IS THEREFORE A WAY OF PROMOTING DIVISIONAL AUTONOMY, IDEALLY

WITHOUT PREJUDICE TO THE MEASUREMENT OF DIVISIONAL
PERFORMANCE OR DISCOURAGING OVERALL CORPORATE PROFIT
MAXIMISATION.

TRANSFER PRICES SHOULD BE SET AT A LEVEL WHICH ENSURES THAT

PROFITS FOR THE ORGANISATION AS A WHOLE ARE MAXIMISED.
 A)

• CURRENT MONTHLY PROFITS OF MANGWIRO LTD CALCULATIONS ARE SHOWN

BELOW ACCORDING TO THE CURRENT MONTHLY OPERATIONS FOR THE UHURU
AND CHOPA DIVISION
THE NEXT STEP IS CALCULATING THE MONTHLY PROFITS FACTORING IN THE 300
UNITS FOR THE NEW CUSTOMER OF CHOPA DIVISION
IN THE CALCULATIONS, FOR UHURU DIVSION WHICH HAS AN EXTRA 200 UNITS
SPARE CAPACITY, 1400 IS GOING TO BE SOLD TO EXTERNAL CUSTOMERS AND 1300
IS GOING TO BE TRANSFERED TO CHOPA DIVISION
UHURU DIVISION CHOPA DIVISION MANGWIRO LTD
SALES
EXTERNAL SALES 140000 200000
INTERNAL 130000 55500
TRANSFER
EXPENSES
PRODUCTION 189000 117000
TRANSFER 130000
TOTAL EXPENSES 189000 247000
PROFIT 81000 8500 89500
• THEREFORE THERE WOULD BE AN INCREASE OF $4500 FROM THE 300 UNITS IN
THE MONTHLY PROFITS OF MANGWIRO LTD IF THE NEW OFFER IS ACCEPTED
• BASED ON THE CURRENT TRANSFER PRICING AGREEMENTS.
 B.

• CALCULATIONS ARE TO BE MADE TO DETERMINE WHETHER THE ARRANGMENTS WILL

FOSTER COORDINATION BETWEEN THE TWO DEPARTMENTS FOR THE TRANSFER OF THE 300
UNTITS FOR THE NEW CUSTOMER.
• THE MATTER OF AVAILABLE CAPACITY COMES INTO PLAY
• SINCE UHURU DIVSION HAS SPARE CAPACITY OF 200 UNITS THEREFORE IT DOES NOT LOSE
ANY CONTRIBUTION FROM THESE SO IT CAN CHARGE THE PRICE OF $70 AS MINIMUM PRICE
• HOWEVER THE EXTRA 100 UNITS HAVE TO BE TRANSFERRED FROM EXTERNAL SALES TO
CHOPA DIVISION SO THE PRICE OF $100 IS CHARGED WHICH FACTORS IN THE LOST
OPPORTUNITY COST OF $30 HAD IT SOLD THE 100 UNITS EXTERNALLY
 UHURU DIVISION CHOPA DIVISION MANGWIRO LTD

SALES

EXTERNAL SALES 14000 55500

INTERNAL 10000
TRANSFER
EXPENSES

PRODUCTION 21000 27000

TRANSFER PRICE 24000

TORAL EXPENAES 21000 51000

PROFIT 3000 4500 7500

THEREFORE THE EXISTING TRANFER AGREEMENTS AFTER FACTORING IN
FOR THE SPARE CAPACITY WOULD FOSTER COODINATION SINCE IT IS
RESULTING IN PROFITS FOR BOTH DIVISIONS AND FOR MANGWIRO LTD AS A
WHOLE
 C.

• THE MINIMUM PRICE . THE SUM OF THE SUPPLYING DIVISION'S MARGINAL COST
AND OPPORTUNITY COST OF THE ITEM TRANSFERRED.
• MINIMUM TRANSFER PRICE = VARIABLE COST + OPPORTUNITY COST
• = $70 + ($100 - $70) = $100 PER UNIT

• THEREFORE, THE MINIMUM TRANSFER PRICE ACCEPTABLE TO UHURU DIVISION

IS $100 PER UNIT.
• THE MAXIMUM PRICE . 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 =$10+ $90 = $100PER UNIT

• THEREFORE, THE MAXIMUM TRANSFER PRICE ACCEPTABLE TO CHOPA DIVISION IS

$100 PER UNIT WHICH FACTORS IN THE VARIABLE COSTS PER UNIT FOR CHOPA
DIVISION
• TO ACHIEVE EQUAL INCREMENTAL PROFITS FOR BOTH DIVISIONS AND APPLY
THE SAME TRANSFER PRICE PER UNIT FOR ALL UNITS TRANSFERRED, WE CAN
SET THE TRANSFER PRICE AT THE MIDPOINT OF THE ACCEPTABLE RANGE.
• $95 IS THE AMOUNT NEEDED BY CHOPA TO BREAKEVEN FOR TGE EXTRA 300
UNITS AFTER FACTORING IN SPARE CAPACITY
• $70 IS THE AMOUNT NEEDED BY UHURU DIVISION FOR THE EXTRA 300 UNITS TO
BREAKEVEN.
• TRANSFER PRICE PER UNIT =
• = ($95 + $70) / 2 = $82.5 PER UNIT WILL THEREFORE ENSURE THE
INCREMENTAL PROFITS ARE SHARED EQUALLY FOR BOTH DIVSIONS WHILST
SERVING AS THE SAME TRANSFER PRICE FOR THE 300 UNITS
• CALCULATIONS FOR THE JUSTFICATION OF THIS AMOUNT IS SHOWN IN THE NEXT
SLIDE
 UHURU DIVISION CHOPA DIVISION MANGWIRO LTD
SALES
EXTERNAL SALES 55500
INTERNAL 24750
TRANSFERS
EXPENSES
PRODUCTION 21000 27000
TRANSFER PRICE 24750
TOTAL EXPENSES 21000 51750
PROFIT 3750 3750 7500
THANK YOU