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Exel Division is part of the Supeer Group. It produces a basic fabric that is then converted in other divisions within the group. The fabric is also produced in other divisions within the Supeer Group and a limited quantity can be purchased from outside the group. The fabric is currently charged out by Exel Division at total actual cost plus 20% profit mark-up. Required: Explain why the current transfer pricing method used by Exel Division is unlikely to lead to: a) maximization of group profit b) and effective divisional performance measurement.

Exel Division is part of the Supeer Group. It produces a basic fabric that is then converted in other divisions within the group. The fabric is also produced in other divisions within the Supeer Group and a limited quantity can be purchased from outside the group. The fabric is currently charged out by Exel Division at total actual cost plus 20% profit mark-up. Required: Explain why the current transfer pricing method used by Exel Division is unlikely to lead to: a) maximization of group profit b) and effective divisional performance measurement.

Practical Management Science
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
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Exel Division is part of the Supeer Group. It produces a basic fabric that is then converted in other divisions within the group. The fabric is also produced in other divisions within the Supeer Group and a limited quantity can be purchased from outside the group. The fabric is currently charged out by Exel Division at total actual cost plus 20% profit mark-up. Required: Explain why the current transfer pricing method used by Exel Division is unlikely to lead to: a) maximization of group profit b) and effective divisional performance measurement.
Transcribed Image Text:Exel Division is part of the Supeer Group. It produces a basic fabric that is then converted in other divisions within the group. The fabric is also produced in other divisions within the Supeer Group and a limited quantity can be purchased from outside the group. The fabric is currently charged out by Exel Division at total actual cost plus 20% profit mark-up. Required: Explain why the current transfer pricing method used by Exel Division is unlikely to lead to: a) maximization of group profit b) and effective divisional performance measurement.
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