A manufacturing company, Mani Co, has two divisions: Division EX and Division YX. Both divisions make a single standardised product. Division EX makes component TEX, which is supplied to both Division YX and external customers. Division YX makes product YAS using one unit of component TEX and other materials. It then sells the completed product YAS to external customers. To date, Division YX has always bought component TEX from Division EX. The following information is available: Division EX Division YX $ $ Selling price 40 96 Direct materials: Component TEX (40) Direct materials (12) (17) Direct labour (6) (9) Variable overheads (2) (3) Selling and distribution costs (4) (1) Contribution per unit before fixed costs 16 26 Annual fixed costs $500,000 $200,000 Annual external demand (units) 160,000 120,000 Capacity of plant 300,000 130,000 Division EX charges the same price for component TEX to both Division YX and external customers. However, it does not incur the selling and distribution costs when transferring internally. Division YX has just been approached by a new supplier who has offered to supply it with component TEX for $36 per unit. Prior to this offer, the cheapest price which Division YX could have bought component TEX for from outside the group was $41 per unit. It is head office policy to let the divisions operate autonomously without interference at all. Required: i) What is the minimum transfer price for component TEX, as per the general transfer pricing rule? ii) What is the minimum and maximum transfer price which the two divisions can use to negotiate the price for component TEX? iii) Discuss the problems which will arise if the transfer price remains unchanged. iv) Advise the divisions on a suitable alternative transfer price for component TEX
A manufacturing company, Mani Co, has two divisions: Division EX and Division YX. Both divisions make a single standardised product. Division EX makes component TEX, which is supplied to both Division YX and external customers.
Division YX makes product YAS using one unit of component TEX and other materials. It then sells the completed product YAS to external customers. To date, Division YX has always bought component TEX from Division EX.
The following information is available:
|
Division EX |
Division YX |
|
|
$ |
$ |
|
|
Selling price |
40 |
96 |
|
Direct materials: Component TEX |
(40) |
|
|
Direct materials |
(12) |
(17) |
|
Direct labour |
(6) |
(9) |
|
Variable |
(2) |
(3) |
|
Selling and distribution costs |
(4) |
(1) |
|
Contribution per unit before fixed costs |
16 |
26 |
|
Annual fixed costs |
$500,000 |
$200,000 |
|
Annual external demand (units) |
160,000 |
120,000 |
|
Capacity of plant |
300,000 |
130,000 |
Division EX charges the same price for component TEX to both Division YX and external customers. However, it does not incur the selling and distribution costs when transferring internally.
Division YX has just been approached by a new supplier who has offered to supply it with component TEX for $36 per unit. Prior to this offer, the cheapest price which Division YX could have bought component TEX for from outside the group was $41 per unit.
It is head office policy to let the divisions operate autonomously without interference at all.
Required:
i) What is the minimum transfer price for component TEX, as per the general transfer pricing rule?
ii) What is the minimum and maximum transfer price which the two divisions can use to negotiate the price for component TEX?
iii) Discuss the problems which will arise if the transfer price remains unchanged.
iv) Advise the divisions on a suitable alternative transfer price for component TEX.
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