Porter Division is part of the Hurry Group. It produces a machine spare part at a cost of $20 which is then transferred to Hermy Division within the group which has additional costs of $10. Hermy Division sells externally at $32. The spare part is also produced in other divisions within the Hurry Group and a limited quantity can be purchased from outside the group. Hurry Group has a policy of transfer price at cost plus 20%. Based one unit Porter Division Hermy Division Hurry Group Sales 24 32 32 Cost to produce 20 20 Cost to purchase 24 Additional cost 10 10 Profit 4 -2 2 Question: Analyse the result above and problem arise on the current transfer pricing method used by the company.
Porter Division is part of the Hurry Group. It produces a machine spare part at a cost of $20 which is then transferred to Hermy Division within the group which has additional costs of $10. Hermy Division sells externally at $32. The spare part is also produced in other divisions within the Hurry Group and a limited quantity can be purchased from outside the group. Hurry Group has a policy of transfer price at cost plus 20%. Based one unit Porter Division Hermy Division Hurry Group Sales 24 32 32 Cost to produce 20 20 Cost to purchase 24 Additional cost 10 10 Profit 4 -2 2 Question: Analyse the result above and problem arise on the current transfer pricing method used by the company.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Porter Division is part of the Hurry Group. It produces a machine spare part at a cost of $20 which is then transferred to Hermy Division within the group which has additional costs of $10. Hermy Division sells externally at $32. The spare part is also produced in other divisions within the Hurry Group and a limited quantity can be purchased from outside the group. Hurry Group has a policy of transfer price at cost plus 20%.
Based one unit
| Porter Division | Hermy Division | Hurry Group | |
| Sales | 24 | 32 | 32 |
| Cost to produce | 20 | 20 | |
| Cost to purchase | 24 | ||
| Additional cost | 10 | 10 | |
| Profit | 4 | -2 | 2 |
Question:
Analyse the result above and problem arise on the current transfer pricing method used by the company.
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