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Subject P2: Advanced Management Accounting

CHAPTER 9 – TRANSFER PRICING

9.1 A

The minimum transfer price must be the opportunity cost of the product. By
supplying Division J Division H foregoes the opportunity to sell on the outside
market so the opportunity cost is the revenue foregone.

9.2 $45

If Able supplies Baker with a unit of Y, it will cost $35 and they (both Able and
the group) will lose $10 contribution from X. So long as the bought-in external
price of Y to Baker is less than $45, Baker should buy from that external source.
The transfer price should therefore be set at $45.

9.3 A

The overseas subsidiary earns profit from

 the transfer price of goods shipped to Fisher Limited

 the royalty payments received from Fisher Limited

This in turn reduces the profits of the UK arm of Fisher Ltd.

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