Page 127 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes 12. Which of the following equations represents the cost-plus method of transfer pricing?
(a) Transfer price = costs-approximate mark up +/-Adjustments
(b) Transfer price = Applicable resale price-Appropriate mark up +/- adjustments
(c) Transfer price = costs+ appropriate mark up +/-Adjustments

(d) Transfer price= costs- applicable resale price -appropriate mark up +/-Adjustments.
13. Which of the following statement(s) is true?
(a) For the selling division, there is only one element of transfer price-fixed cost.
(b) For the buying division, the price charged by the selling division is variable cost.

(c) The selling division has three elements of cost-variable, fixed, and profit margin.
(d) both (b) and (c)
14. Transfer pricing evolved
(a) To improve profit of a company

(b) To improve profit of a division of a company
(c) To cut necessary expenditure of the division of a company
(d) To estimate the financial needs of the company



Case Study Divisions in a Company

large company is organized into several manufacturing divisions. The policy of
the company is to allow the divisional Managers to choose their sources of supply
Aand when buying from or selling to sister divisions, to negotiate the prices just as
they will for outside purchases or sales.
Division X buys all of its requirements of its main raw material R from Division Y. The
full manufacturing cost of R for Division Y is ` 88 per kg. at normal volume.
Till recently, Division Y was willing to supply R to Division X at a transfer price of ` 80
per kg. the incremental cost of R for Division Y is ` 76 per kg. Since Division Y is now
operating at its full capacity, it is unable to meet the outside customer’s demand for R at its
market price of `100 per kg. Division Y therefore threatened to cut off supplies to Division
X unless the latter agrees to pay the market price for R.
Division X is resisting the pressure because its budget based on the consumption of 1,00,000
kg. per month at a price of ` 80 per kg. is expected to yield a profit of ` 25,00,000 per month
and so a price increase to ` 100 per kg. will bring the division X close to break even point.

Division X has even found an outside source for a substitute material at a price of ` 95 per
kg. Although the substitute material is slightly different from R, it would meet the needs
of division X. Alternatively, Division X is prepared to pay Division Y even the
manufacturing cost of ` 88 per kg.

Contd...

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