QUESTION No 1

A manufacturer of cornflakes has 2 division, one producing cornflakes, and the other packing
division that manufactures cartons. The production division purchases all cartons from
packing division. Cost of cartons from outside vendors would be :

Number of Cartons INR

5000 77,000
8000 95,000

Production cost incurred by the packing division for similar value cartons:

Number of Cartons INR

5000 75,000
8000 80,000

The production & Sale of the final product, cornflakes are as below:

Volume (number of cartons Total cost (excl cost of Sales value (packed in
of cornflakes sold) cartons) cartons)
5,000 120,000 200,000
8000 180,000 300,000

An appropriate transfer pricing policy is being framed. As the management accountant,

calculate:
(i) Transfer price based on
a. Shared profit relative to cost method
b. Market method
Show the profitability of each division under both methods
(ii) Discuss effects of both methods in profitability of divisions
QUESTION No 2
Division A transfer’s goods to Division B. Division A incurs marginal cost of INR10 p.u.
Division B incurs marginal cost of INR5 p.u. to process it further. Division B sells finished
goods externally at INR 20 p.u.
To promote goal congruence
 (i) What should be the maximum TP that Division A should charge? Assume there is
no external market for this intermediate product.
(ii) If division B can buy the intermediate part externally for (i) INR 14 p.u. (ii) INR
18 p.u what should be the maximum price that division A can charge to remain
competitive with external vendor?
(iii) Assume that intermediate goods of Division A can be sold externally at INR 12
p.u. How does the opportunity cost affect the TP range when Division B can
procure the part at INR 14 p.u.?
Question No. 3
A company has Division A producing 3 products called X, Y & Z. Each product can be sold
in open market in the following manner:
Particulars X Y Z
Selling Price P.U 96 92 80
Variable Cost of production in Division A 33 24 28
Labour Hours required per unit in Division A 6 8 4
Maximum external sales (units) 800 500 300

Product Y can be transferred to division B, but the maximum quantity that might be required
for transfer is 300 units of Y
Division B could buy similar product in the open market at price of INR 45 p.u

(i) What should be the transfer price per unit of 300 units of Y, if the total labour
hours available with Division A are :
a. 13,000 hours
b. 8,000 hours
c. 12,000 hours
(ii) Include the transfer pricing range that can promote goal congruence
Question No 4
A company has 2 divisions A& B, making products A & B respectively. One unit of A is an
input for each unit of B. B has a production capacity of 45,000 units and ready market. Other
info available regarding Division A are as below:
Capacity (production units) 50,000
Maximum external sales 30,000
Fixed Cost up to 30,000 units. Beyond 30,000 units- increases by INR INR
50,000 for every additional 10,000 units 430,000
Variable mfg cost p.u 55
Variable selling cost p.u (external sales) 10
Variable selling cost (spl order/transfer to B) 5
Selling price p.u 80
Selling price p.u (spl sales) 70
B can buy the input A from outside at slightly incomplete stage at INR 45 p.u. and will incur
sub-contracting charges at INR 30 p.u. to match it to the stage at which it receives goods
from division A. Division B is willing to pay a maximum of INR 75 p.u if division A
supplies its entire demand of 45,000 units. If Division A supplies lesser quantity, division B is
willing to pay only INR 70 p.u.
Division A has also received a special order for 15,000 units which it needs to either accept in
full or reject. Division A may choose to avoid variable selling cost of INR 5 p.u. on transfer
to B or special order by incurring a fixed overhead of INR 50,000 p.a instead

(i) What is the best strategy for division A? show the profitability of that option.
(ii) What will be the range of transfer price under the best strategy chosen?

QUESTION No 5
Atal Ltd has two Divisions Tubes and Tyres. Tubes Division produces three products K, L
and M.
The data for the three products is given below
K L M
Market Price $ p.u. 120 115 100
Variable Cost $ p.u. 84 60 70
Direct Labour Hours p.u. 4 5 3
Maximum external sales units 1,600 1,000 600
Tyres Division has a demand for 600 units of product L for its use.
If Tubes Division cannot supply the requirements, Tyres Division can buy a similar product
from the outside market at 112 per unit.

REQUIRED:
What should be the transfer price of 600 units of L for Tubes Division, if total direct labour
hours available in Tubes Division is 15,000?

QUESTION No 7
ABC Miners operates 2 divisions, one in Japan and the other un the UK. Mining division is
operated in Japan which is rich in raw emerald.
The other division in UK is the processing division. It processes the raw emerald into
polished stone fit for human wearing.
The cost details of each division is as follows:
Japan Mining
Division UK Processing division
Division
Per carat of raw per carat of polished
emerald emerald
Variable
Cost 2500 Yen 150 Pounds
 Fixed Cost 5000 yen 350 pounds

Several polishing companies in Japan buy raw emerald from other local mining companies at
9000 Yen per carat. Current foreign exchange rate if 50 Yen = 1 pound. Income Tax rates are
20% & 30% in Japan and UK respectively.
It takes 2 carats of raw emerald to yield 1 carat of polished stone. Polished stone emerald
sells for 3000 Pounds per carat.

Required:
1. Compute transfer price for one carat of raw emerald transferred from mining division
to processing division under two methods (i) 200 % of full cost and (ii) market price
2. 1000 carats of raw emerald are mined in the Japan mining division and then [rocessed
and sold in the UK processing division. COMPUTE the after tax operating income for
each of the divisions under both the transfer pricing methods stated above in (1).