ANNYEONG!

ROU P 6
E TH E G
WE A R

DELA VICTORIA, WENIEL

MANIMOG, KRYSTEL MARIE

SILAGAN, GLYDEL

VIVERO, ALEX BERTH

RESPONSIBILITY ACCOUNTING
AND

TRANSFER PRICING

PROBLEMS
 PROBLEM 1:
ROI, COMPARISON OF THREE
DIVISIONS
 B. 1
P RO
Consider the following sales and operating
data for the three divisions of a conglomerate:
DIVISION X DIVISION Y DIVISION Z
SALES P280,000 P360,000 P500,000
OPERATING P10,000 P12,600 P28,800
INCOME
OPERATING P40,000 P70,000 P180,000
ASSET
MINIMUM 10% 19% 20%
REQUIRED
RATE OF
RETURN
REQUIRED:
1. COMPUTE THE RETURN ON
INVESTMENT (ROI) FOR EACH
DIVISIONS.
RETURN ON INVESTMENT
(ROI)

- is a performance measure used to

evaluate the efficiency or profitability of an
investment or compare the efficiency of a
number of different investments.
 1
I R ED
U
REQ
ROI = INCOME / INVESTMENT

DIVISION X DIVISION Y DIVISION Z

P10,000 P12,600 P28,000

P40,000 P70,000 P180,000

25% 18% 16%

REQUIRED:
2. ASSUME THAT EACH DIVISION IS
PROVIDED WITH AN INVESTMENT
OPPORTUNITY THAT COULD PRODUCE 20
PERCENT RETURN ON INVESTMENT. WHICH
DIVISIONS WOULD ACCEPT OR REJECT IT?
 2
I R ED
U
REQ

DIVISION X WILL REJECT. WHILE,

DIVISION Y AND Z WILL ACCEPT IT.
 PROBLEM 2:
TRANSFER PRICING SITUATIONS
 B. 2
P RO
IN EACH OF THESE CASE BELOW, ASSUME
THAT DIVISION A HAS A PRODUCT THAT CAN BE
SOLD EITHER TO OUTSIDE CUSTOMERS OR
DIVISION B OF THE SAME COMPANY FOR USE IN
IT’S PRODUCTION PROCESS. THE MANAGERS OF
THE DIVISIONS ARE EVALUATED BASED ON
THEIR DIVISIONAL PROFITS.
 CASE
DIVISION X 1 2

CAPACITY IN UNITS 100,000 100,000

NUMBERS OF UNITS 100,000 80,000
BEING SOLD TO
OUTSIDE CUSTOMERS

SELLING PRICE PER P50 P35

UNIT TO OUTSIDE
CUSTOMERS

VARIABLE COST PER P30 P20

UNIT
FIXED COST PER UNIT P8 P6
( BASED ON CAPACTY)
 CASE
DIVISION Y 1 2

NUMBER OF UNITS 20,000 20,000

NEEDED FOR
PRODUCTION
PURCHASE PRICE P47 P34
PER UNIT NOW
BEING PAID TO AN
OUTSIDE SUPPLIER
 GENERAL RULE

 If there is an excess capacity, the transfer

price is Incremental cost or Variable cost.

 If there no excess capacity, the transfer

price is the Incremental cost or Variable cost
plus Opportunity cost to the seller.
REQUIRED:
1.REFER TO THE DATA IN CASE A ABOVE.
ASSUME THAT P2 PER UNIT IN VARIABLE
SELLING COST CAN BE AVOIDED ON
INTRACOMPANY SALES. IF THE MANAGERS
ARE FREE TO NEGOTIATE AND MAKE
DECISIONS ON THEIR OWN, WILL A
TRANSFER TAKE PLACE? IF SO, WITHIN
WHAT RANGE WILL THE TRANSFER PRICE
WILL FALL? EXPLAIN.
 1
I R ED
U
REQ
FORMULA
TRANSFER PRICE = INCREMENTAL COST or VARIABLE
COST + OPPORTUNIY COST TO THE SELLER

TP = IC or VC + OC
TP = (P30- P2) + 20
TP = P28 + 20
TP = P48 / UNIT
REQUIRED:
2.REFER TO THE DATA IN CASE B ABOVE. IN
THIS CASE, THERE WILL BE NO REDUCTION
IN VARIABLE SELLING COST ON
INTRACOMPANY SALES. IF THE MANAGERS
ARE FREE TO NEGOTIATE AND MAKE
DECISIONS ON THEIR OWN, WILL
TRANSFER TAKE PLACE? IF SO, WITHIN
WHAT RANGE WILL THE TRANSFER PRICE
FALL? EXPLAIN.
Excess Capacity
Capacity in Unit - Unit sold to outside customers =
Excess Capacity Unit

100,000-80,000= 20,000 Excess Capacity Unit in

Division X
 2
I R ED
U
REQ

1.YES A TRANFER WILL TAKE PLACE.

2.THE REQUIREMENTS OF THE TWO DIVISIONS ARE

COMPATIBLE AND A TRANSFER WILL HOPEFULLY TAKE
PLACE AT A TRANSFER PRICE WITHIN THE RANGE:

P20 < TRANSFER PRICE < P34.

THANK
YOU!!!