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Transfer Pricing Problem Solution

The document discusses two methods for calculating transfer pricing and the resulting profits under different sales volumes and prices. Method 1 calculates a transfer price of $8 per unit with $4 in variable costs and $3 in fixed costs. Assuming sales volumes of 9000, 7000, 5000, and 2000 units and a constant selling price of $28, the profits are $38600, $27800, $17000, and $800 respectively. Keeping the selling price constant results in higher profits than allowing it to vary. Under the second method, profits at constant sales volumes of 9000 but varying prices of $27, $26, and $25 are $34000, $24000, and $14000 respectively. Prof

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Hardik Chauhan
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4K views1 page

Transfer Pricing Problem Solution

The document discusses two methods for calculating transfer pricing and the resulting profits under different sales volumes and prices. Method 1 calculates a transfer price of $8 per unit with $4 in variable costs and $3 in fixed costs. Assuming sales volumes of 9000, 7000, 5000, and 2000 units and a constant selling price of $28, the profits are $38600, $27800, $17000, and $800 respectively. Keeping the selling price constant results in higher profits than allowing it to vary. Under the second method, profits at constant sales volumes of 9000 but varying prices of $27, $26, and $25 are $34000, $24000, and $14000 respectively. Prof

Uploaded by

Hardik Chauhan
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLS, PDF, TXT or read online on Scribd
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Soln to Lambda Unit cost under method 1 x y Var cost 4 fixed cost 3 margin 1 total cost transfer price

std cost 8 8

z 5 4 0.6 9.6 17.6 23.6 5 1

Soltuion to questions Assuming SP to be constant and using transfer price calculated as above: Sales vol 9000 7000 5000 2000 0 Profit 38600 (28-22.6)*units-10000 27800 17000 800 -10000

Assuming sales volume to be constant SP 27 26 25 Profit 34000 24000 14000

23 -6000

22 -16000

Decision would be keep SP constant since profit is higher Using transfer price to be split inot fixed and variable, fixed portion of Div A would be 40000 variable portion would be 4 Assuming SP to be constant and using transfer price calculated as above: Sales vol Contribution (28-14) Less:FC Profit 9000 126000 96000 30000 7000 98000 96000 2000 5000 70000 96000 -26000 2000 28000 96000 -68000 0 0 96000 -96000

Profits would not change under either of the methods if sales volume is 10000 units

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