Honeylette Joyce Lascano (BSMA 31O1)

ITEM 01: Problem

Victorino Inc. manufactures electronic equipment. There are several divisions inside the
company, each operating as its own profit unit. Division A has declared to go outside the
company to buy materials, since it was informed that Division B was increasing its selling price
of the same materials to P550, Information for Division A and Division B is as follows:

Outside price for materials 450

Division A's annual purchases. 12,000
Division B's variable costs per unit 400
Division B's fixed costs 2,000,000
Division B's capacity utilization 100%

Question:

• Will the company benefit if Division A purchases outside the company? Assume Division B
cannot sell its materials to outside buyers.

• And what if the outside market price for the materials drop P25, should A buy from the outside?

Answer: First Bullet

Division A's purchase decision from the overall firm perspective:

Purchase costs from outside 12,000 × 450 = P5,400,000

Less: Savings of Division B's variable cost. 12,000 × 400 = 4,800,000

Net Cost (Benefit) for A to buy outside 600,000

Division A should buy inside from Division B para sa benefit of the overall company, dahil mas
makakasave siya o mas makakamura siya kung bibili siya kay Division B. Assuming Division B
has no outside sales.

Explanation:

Para makuha kung nagbenefit ba si A ay kailangan kuhanin muna kung magkano ang purchase

cost kapag sa labas bumile (annual purchases ni Division A -dahil si A ang tinatanong sa
problem x outside price)

Then, ideduc ang maaaring masave kung kay Division B siya bibili. (annual purchases ni Division
A -dahil si A ang tinatanong sa problem x variable cost ng per unit ni Division B)
Then, imimnus lang pala makuha ang Net cost, wherein kung magbebenefit ba si A or hindi
kapag sa outside siya bumili. Answer is no, dahil dapat kay Division B siya bumili para sa benefit
ng company.

Answer: Bullet 2

Assuming the outside price drops from 450 to 380:

Purchase costs from outside 12,000 × 380 = P4,560,000

Less: Savings of Division B's variable cost. 12,000 × 400 = 4,800,000

Net Cost (Benefit) for A to buy outside (240,000)

Division A should buy outside for the benefit of the company

Explanation:

Para makuha kung magbebenefit ba si Division A ay, ( annual purchases × sa 389 dahil nagdrop
ang price in outside) Less the ( annual purchases × variable cost) Then minus lang purchase
costs from outside at Division B's variable cost para makuha anv Net Cost (or ang benefit)

And the answer is Yes, magbebenefit ang company kapag nagpurchase in outside.

ITEM 2: Theories

To avoid waste and maximize efficiency when transferring products among divisions in a
competitive economy, a large diversified corporation should base transfer prices on

a. variable cost.

b. market price.

c. full cost.

d. production cost.

ANSWER :

B. Market Price.

EXPLANATION:

a. Ang variable cost ay unit level cost, as they vary with the number of units produced. Pero
maaaring hindi equal ang quantity supplied sa demanded.

b. Market price, ang best transfer price is market price. Because individual business units or
segments have to compete with the rest of the world, they have to beat or conform with the
prevailing market price to stay competitive. They have to follow the market rules in the
capitalistic model of a free enterprise system.

c. Ito yung complete end-to-end cost of producing products or services. Pwede ding hindi
maging tugma, kasi pwedeng mas mataas pala ang naging gastos, lalo na't kung sa market
mababa naman ang demand.

d. Ito naman yung total expenses incurred by a business in producing a product or service.
Same lang din, pwedeng hindi maging competitive kung hindi naman mataas ang demand ng
product or service sa market.

ITEM 3: Theories

What should be the objective of a transfer pricing system??

A. maximize the transfer price

B. minimize the transfer price

C. maintain goal congruence between the divisions and the entire firm

D. maintain suboptimization.

Answer:

C. Maintajn goal congruence between the division and the entire firm

Explanation:

A. If there's need to maximize in transfer pricing, yuon ay ang pagmamaximize ng resources to

increase profit.

B. Hindi kinakailangan na iminimize ang transfer price.

C. Ang goal congruence ang objective ng transfer pricing system. Ito ay kapag ang overall goal
ng organization ay nagprevails over that of divisional goals. In which people in multiple levels of
an organization share the same goal. Sa goal congruence namamaximize ang profit ng whole
company.

D. Kapag ang entity goal ng division ay nagprevails over the overall organization's goals ito ang
suboptimization, meaning when a business or a company is not as successful as it could be
because one part or department or division works only on its own or only for its own success.