TUTORIAL QUESTIONS - TRANSFER PRICING (DIY)

QUESTION 2 (Quiz 3 Sem 2, 2016/ 2017)

Roda Sdn. Bhd. (RSB) has two divisions, A and B that manufacture expensive bicycles. Division A
produces the bicycle frame, and division B assembles the rest of the bicycle onto the frame. There is a
market for both the intermediate product and the final product. Each division has been designated as an
investment centre. The transfer price for the intermediate product has been set based on market price.

It was also established that a transport cost of RM10 may be avoided when division A sells the
intermediate product to division B. Division B requires 200 units of intermediate products every month.
The following data are available for each division:
RM
Selling price for final product 300
Selling price of the intermediate product in the market 200
Variable cost per unit in division B 150
Variable cost per unit in division A 120

Transform into the SP and VC

based on flow of products:

? __________________ Division ? ______________________ Division

Intermediate product RM Final product RM
Selling price 200 Selling price 300
Less: VC Less: VC
Contribution Contribution

a) Identify between selling division vs buying division.

Selling division: Buying division:

______________________
_______________________

b) Identify between INTERMEDIATE PRODUCT vs END PRODUCT.

Intermediate product: End product:

_______________________
_______________________

c) Assume that there is no excess capacity in selling division. Determine whether

the market price is a suitable transfer price for both divisions.
Division _______: (Selling division)
STEP 1: Identify the formula for the above situation – no excess capacity in Selling
Division (Refer to the formula given at the last page).
Formula = _________________________________________

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 STEP 2: Identify the TP based on the formula in Step 1.
TP: _________________________________________

Step 3: Identify the contribution/loss made from the transfer price.

RM
TP
Less: VC
Contribution

Division __________: (buying division)

Identify the contribution/loss from buying the intermediate product from selling division:

RM
SP
Less: TP
VC
Contribution/Loss

Decision (Does it worth to have the above TP and SP?:

_________________________________________________________________________
____

b) Assume that division A’s maximum capacity for this product is 1,000 units per month and
sales to the external market is 800 units. Explain the suitability of charging division B a
transfer price of RM200.

Step 1: Identify excess (remaining) capacity for internal demand after fulfilling external
demand by selling division.

Units
Full capacity
Less: External
Excess (internal demand)

Step 2: Identify the formula for the above situation – Selling division has limited demand
capacity for external customers but able to supply for buying division. (Refer to the
formula given at the last page).
Formula = _________________________________________

STEP 3: Identify the TP based on the formula in Step 2.

TP: ______________________________________________________

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Decision (Does it worth to charge TP at RM200?):
_________________________________________________________________________
_______________

How about the Buying division?.at what maximum TP to be charged?

SP
Less: VC
Max TP

Based on the max TP above, is it worth charging TP at RM200?..What’s the effect it might
have on the contribution of the buying division?

c) Continue from part (b). Assuming that Buying division received an offer to purchase the
intermediate product at RM140 per unit from an external supplier. Explain the impact of
division B accepting the offer.

If purchase from Selling division vs accept offer from external supplier:

RM
TP charged by Selling division
Less: Offer from external 140
supplier
Different price
x no of demanded units 200 units
Total save/extra cost

Calculation of any increase contribution or loss from the above calculation resulting from
accepting offer from outside supplier at price RM140:

RM
SP for final product
Less: Offer from external supplier 140
Variable costs in buying
division
Contribution/Loss
x no of demanded units 200 units
Total contribution/loss

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 d) Suppose that the selling price for the intermediate product dropped to RM195 and
sales to external parties increased to 900 units based on a maximum capacity of 1,000
units per month. Buying Division requires 200 units from Selling division. Determine the
TP that should lead to the goal congruence for both divisions and company as a whole.

From the perspective of Selling Division:

Step 1: Identify excess (remaining) capacity for internal demand after fulfilling external
demand by selling division.

Units Units
Full/Max capacity
Less: External demand VS
Excess (internal demand) Buying division’s 200
actual demand

Step 2:
Identify the TP based on actual demand of Buying division and excess capacity available by
selling division. The remaining units that could not be supplied by the Selling division shall be
purchased from external supplier by the Buying Division.

Actual demand:
200 units Excess: TP: (based on situation – excess capacity)
____________ units _______________________________________

TP: (based on situation – the possibility of losing

External supplier: contribution due to buying division purchase from external
____________ units supplier)
________________________________________

Average TP = (Excess units / Total actual demand x TP) + (External supplier units/ Total actual demand
x TP)

= _____________________________________

Is worth buying at the above transfer pricing (TP)? Check contribution earned by Buying
division:

RM Decision:
SP
Less: TP

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 VC
Contribution/Loss
Situations to be considered (formulas):
If SD has external
Unlimited demand No External market
market
•has an opportunity •If SD has unlimited •SD able to supply
cost √ external demand internal buying
•TP = MC – avoidable (operate @ full division without
costs (selling & capacity) sacrificing
distribution, •SD needs to sacrifice external demand.
collection expense, any allocation for •TP = MC
packaging and external demand to
selling fulfill BD.
commission). •TP = MC + Opportunity
cost

JAR