Page 122 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Machine division ` Tractor division `
Sales: Sales HOCL
Crane shafts 1500 236 354000 75 8000 600000
Normal market 500 240 120000 Variable cost:
Unit 5: Transfer Pricing
Tyre rims 4400 175 770000 Transfer from machine division 354000
1500 236
Total sales 1244000 Processing of material labour 112500
Variable cost: Total variable cost 466500 Notes
Crane shafts to tractor divisions
1500*132 198000 Fixed cost 140000
Normal market 500 136 68000 Total cost 606500
Tyre rims 4400 100 440000 Loss (6500)
Total variable cost 706000
Fixed cost 8 36000 288000
Total cost 994000
Profit 250000
Overall profit of the company ` 250000 – 6500 = 243500

(iii) Manufacturing crane shafts supplied to tractor division by using over time and
transfer based on adjusted marginal cost.

Machine division ` Tractor division `
Sales: Sales HOCL
Crane shafts to tractor division 240000 75 8000 600000
1500 160
Crane shafts 2000 240 480000 Variable cost:
Tyre rims 4400 175 770000 Transfer from Machine division 240000
1500 160
Total sales 1490000 Processing of material labour 112500
Variable cost: Total variable cost 352500
Crane shafts to tractor division 240000 Fixed cost 140000
1500 160
Crane shafts in normal market 272000 Total cost 492500
2000 136
Tyre rims 4400 100 440000 Profit 107500
Total variable cost 952000
Fixed cost 8  36000 288000
Total cost 1240000
Profit 250000

Overall profit of the company ` 250000 + 107500 = 357500
The marginal cost and transferable price of crane shaft per kg will be
(38 + 56 + 70) = 164 – 4 = ` 160

Option C is most profitable, gives highest profit to the company.

Example: Division A of a large divisionalised organization manufactures a single
standardized product. Some of the output is sold externally whilst the remainder is transferred
to Division B, where it is a subassembly in the manufacture of that division’s product. The unit
costs of Division A’s product are as follows:
Capacity to produce the part 15,000 units
External sales at ` 30 per unit 10,000 units

Transfer to division B 5,000 units

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