Page 13 - Manac Costing Test 2 class slides - 4. Transfer Pricing

TRANSFER PRICING

Transfer Pricing Example

Orco Ltd has two divisions, division Barco and division Gray. Division Barco
produces a product that may be sold to the external market or transferred to
division Gray, who uses the product as a subpart in the manufacturing of a
different product.

The variable cost of manufacturing the product amounts to R50 (including R2
packaging and delivery cost) and the Barco-division incurs fixed costs of R25

000 per annum. The division has a maximum capacity of 2 000 units per
annum.

The Gray-division incurs R10 000 fixed cost per annum and an additional R75
variable cost per product before the completed unit is sold on the external
market at R180 per product. The Gray-division wishes to sell 600 products this
year. There will be no packaging and delivery costs on the internal transfer.

Barco can sell the units on the external market for R90 each and the normal
sales demand for this product is 1 800 units.

REQUIRED

Recommend a transfer price per unit for the 600 units if:

(a) The Gray division can buy the units from an outside supplier at R90 each.

(b) The Gray division cannot purchase these units anywhere else as no
external market exists.
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