The Busalika Company of Dar es Salaam, fixes the inter-divisional transfer prices for its products on the basis of cost plus a return on investment in the concerned division. The budget for Makoko Division of the company for the 2020/2021 financial year appears as follows:-

Investment in Makoko Division:

Non- Current Assets 50,000,000
Current Assets 80,000,000
Current liabilities 30,000,000
Annual fixed costs of the division 20,000,000
Variable cost per unit of product 1,000
Budgeted volume: 400,000 units per year.
Desired Return on Investment (ROI) 28%


Determine the transfer price of Makoko Division.

  • Posted: 09 Jul 20
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  • Attempts: 35
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  • Correct: 16

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Transfer price

The Nyamanoro Solar Power Company has two major production divisions: Parts and Assembly each of which is completely decentralized. The transfer price for the intermediate product of the Parts Division has been negotiated at Tshs. 2,000. Both the intermediate and the final products have ready competitive markets. Currently, the final product is sold at Tshs. 3,100 in the market. The variable costs are T.shs. 1,350 and Tshs. 1,500 in the Parts and Assembly divisions respectively.


  1. If there is no excess capacity in the Parts Division, should transfers to the Assembly division be made? If so, what is the appropriate transfer price?
  2. If the Parts Division has a maximum capacity of 1,200 units per month, and if sales to outsiders are not expected to exceed 1,000 units per month, the excess of over 1,000 units can be produced and transferred by the parts Division to Assembly Division.
    Market research has determined that if the external price of the intermediate product is dropped to shs. 1,930, all 1,200 units could be sold externally. Should the company reduce the selling price of its intermediate product? Show all necessary calculations.

  • Posted: 09 Jul 20
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  • Attempts: 121
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  • Correct: 38

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Appropriate Transfer price

Makanya Company has two divisions North and South. North Division manufactures product called UMA and South division manufactures product called WAMO. Each unit of WAMO uses a single unit of UMA as a component. North Division is the only manufacturer of UMA and supplies both South division and outside customers. The projected data for North and South divisions for the year 2020 are as follows:

North Division South Division
Fixed costs (T.shs) 75,000,000 180,000,000
Variable cost per unit (T.shs) 2,800 6,200*
Capacity in units 320,000 200,000
* without transfer price

A recent market survey has indicated that demand for Makanya company products from outside customers for the year 2020 will be as follows:

The estimated product demand for this product will increase by 25 units for every one shilling reduction in selling prices and that at T.shs 10,000 per unit demanded will be nil.

The product demand for this product will increase by 40 units for the decrease of one shilling in selling price and the demand will be zero when the selling price is at T.shs 40,000 per unit.


Calculate the unit price of WAMO and UMA that would maximize the company profitability and determine the total contribution to the company

  • Posted: 09 Jul 20
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  • Attempts: 11
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  • Correct: 7

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Optimal Quantity - UMA

Sanilac Ltd has been offered supplies of special ingredient X at a transfer price of T.shs 15,000 per kg by Zodiac Ltd, which is the part of the same group of companies. Zodiac Ltd processes and sell special ingredient X to customers external to the group at T.shs 15,000 per kg. Zodiac Ltd based its transfer price on full cost plus 25% profit mark-up. The full cost has been estimated as 75% variable and 25% fixed.

Discuss the transfer price at which Zodiac Ltd should offer to transfer special ingredient X to Sanilac Ltd in order that group profit maximizing decisions may be taken or financial grounds in each of the following situations:

  1. Zodiac Ltd has external market for all production of special ingredient X at a selling price of T.shs 15,000 per kg. Internal transfer to Sanilac Ltd would enable T.shs 1,500 per kg of variable packaging cost to be avoided.
  2. Conditions are as per (i) above but Zodiac has production capacity for 3,000 kg of special ingredient X for which no external market is available.
  3. Conditions are as per (ii) above but Zodiac Ltd has alternative use of for some of its spare production capacity. This alternative use is equivalent to 2,000 kg of special ingredient X and would earn a contribution of T.shs 6,000,000.

  • Posted: 09 Jul 20
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  • Attempts: 15
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  • Correct: 8

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(i) Transfer price

MWEMA Company Ltd is a fast growing company in Dar es Salaam with two divisions, Intermediate and Final Division.
Intermediate Division produces three products, AA, BB and CC. The products are sold to Kenyan specialist producers operating in Dar es Salaam as well as to the Final Division at the same prices.
The Final Division buys AA, BB and CC exclusively from the Intermediate Division. Consequently, the Intermediate Division has been instructed by the board of directors in its recent meeting to sell all its products to final division.
The price and cost data for both divisions are as follows:

a) Intermediate Division

AA (T.shs) BB (T.shs) CC (T.shs)
Transfer 20,000 20,000 30,000
Variable mfg cost per unit 7,000 12,000 10,000
Fixed costs 50,000,000 100,000,000 75,000,000

The Intermediate Division has a maximum monthly capacity of the combined three products equal to 50,000 units. The processing constraints are such that capacity production can only be maintained by producing at least 10,000 units of each product. The remaining capacity can be used to produce 20,000 units of any combination of the three products.

b) Final Division

XX (T.shs) YY (T.shs) ZZ (T.shs)
Final selling price 56,000 60,000 60,000
Variable cost per unit:
Internal transfer 20,000 20,000 30,000
Processing in final division 10,000 10,000 16,000
Fixed costs 100,000,000 100,000,000 200,000,000

The Final Division has a sufficient capacity to produce up to 20,000 units more than it is currently producing, but, the insufficient supply of products AA, BB, and CC, is limiting production.

Further, the Final Division is able to sell all the products that to can produce at the final selling prices.


  1. From the view point of Intermediate Division, indicate the products which would maximize its divisional profits and compute the total company profit, given that all the Intermediate Divisionā€˜s production is transferred internally.
  2. From the view point of Final Division, compute the products and quantities purchased from the intermediate division which would maximize its divisional profits and indicate the effect on the company profit.

  • Posted: 09 Jul 20
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  • Attempts: 0
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  • Correct: 0

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(i) Total Intermediate profit
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