Transfer Pricing Questions
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:
TZS | |
---|---|
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% |
Required;
Determine the transfer price of Makoko Division.
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.
Required:
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 |
A recent market survey has indicated that demand for Makanya company products from outside customers for the year 2020 will be as follows:
UMA:
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.
WAMO:
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.
Required:
Calculate the unit price of WAMO and UMA that would maximize the company profitability and determine the total contribution to the company
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.
Required:
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:
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.
Required: