Scala Oil has the following information available regarding its three divisions: production, transportation and refining:Production (crude oil)Transportation (Crude oil)Refining (petrol)Variable costs: $2/barrel (of oil)Variable costs: $1/barrelVariable costs: $8/barrelFixed costs: $6/barrel Full Cost: $8/barrelFixed costs: $3/barrel Full Cost: $4/barrelFixed costs: $6/barrel Full Cost: $14/barrelThe division sells to the transport division. The external market will pay $13 a barrel.The division buys from the production division and sells to the refining division; the market price is $18 a barrelThe external market will pay $52 a barrel.It refines at a rate of 2 barrels of crude oil to 1 barrel of petrol. aFor an output of 100 barrels of crude oil, produce profit statements indicating revenues, total costs including transferred in costs and profits for each division using:i) market prices transfer pricing.ii) cost plus transfer pricing (cost plus 10%).iii) negotiated prices (from production to transport at $10 a barrel and from transport to refining at $16.75 a barrel) b.Advise the Directors of the advantages and disadvantages of the following transfer pricing practices:o marketpricetransferso costplustransferso negotiatedpricetransfers

Transfer pricing is an accounting and taxation practice that allows for pricing transactions…

Answered: Scala Oil has the following information…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Scala Oil has the following information available regarding its three divisions: production, transportation and refining:

Production (crude oil)	Transportation (Crude oil)	Refining (petrol)
Variable costs: $2/barrel (of oil)	Variable costs: $1/barrel	Variable costs: $8/barrel
Fixed costs: $6/barrel Full Cost: $8/barrel	Fixed costs: $3/barrel Full Cost: $4/barrel	Fixed costs: $6/barrel Full Cost: $14/barrel
The division sells to the transport division. The external market will pay $13 a barrel.	The division buys from the production division and sells to the refining division; the market price is $18 a barrel	The external market will pay $52 a barrel. It refines at a rate of 2 barrels of crude oil to 1 barrel of petrol.

For an output of 100 barrels of crude oil, produce profit statements indicating revenues, total costs including transferred in costs and profits for each division using:

i) market prices transfer pricing.
ii) cost plus transfer pricing (cost plus 10%).
iii) negotiated prices (from production to transport at $10 a barrel and from transport to refining at $16.75 a barrel)

b.
Advise the Directors of the advantages and disadvantages of the following transfer pricing practices:

o marketpricetransfers
o costplustransfers
o negotiatedpricetransfers

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