SUGGESTED ANSWER
1. Division Z is a profit center which produces four products A, B, C and D. Each product is sold in the external market also. Data for the period is:
Particulars | A | B | C | D |
Market price per unit (Rs.) Variable cost of pdn per unit (Rs.) Labour hours required per unit | 150 130 3 | 146 100 4 | 140 90 2 | 130 85 3 |
Product D can be transferred to division Y but the maximum quantity that may be required for transfer is 2,500 units of D.
The maximum sales in the external market are:
A 2,800 units
B 2,500 units
C 2,300 units
D 1,600 units
Division Y can purchase the same product at a price of Rs.125 per unit from outside instead of receiving transfer of product D from Division Z.
What should be the transfer price for each unit for 2,500 units of D, if the total labour hours available in division Z are 20,000 hours?
Solution:
Ranking of products when availability of time is the key factor
Particulars | A | B | C | D |
Market price Less: Variable cost Contribution p.u(Rs) Labour hours p.u Contribution /labour hour Ranking Maximum demand (units) Total hours Allocation of 20,000 hours on the basis of ranking | 150 130 20 3 6.67 IV 2,800 8,400 600 * | 146 100 46 4 11.5 III 2,500 10,000 10,000 | 140 90 50 2 25 II 2,300 4,600 4,600 | 130 85 45 3 15 I 1,600 4,800 4,800 |
* Balancing figure
Note: Time required for meeting demand of Rs.2, 500 of product D for division Y is 7,500 hours. This requirement of time for providing 2,500 units of product D for division Y can be met by sacrificing 600 hours of product A (200 units) and 6,900 hours of product B(1,725 units)
Transfer price = variable cost + opportunity cost
= Rs.85+(Rs.6,900 X 11.5 + 600x6.66)
2500
= Rs.85 + (79350 + 4000) = Rs(85+33.34) = Rs.118.34
2500
2. P Ltd has three divisions – X, Y and Z, which makes products X, Y and Z respectively. For division Y, the only direct material is product X and for Z, the only direct material is product Y. Division X purchases all its raw material from outside. Direct selling overhead representing commission to external sales agent is avoided on all internal transfers. Division Y additionally incurs Rs.10 per unit and Rs.8 per unit on units delivered to external customers and Z respectively. Y also incurs Rs.6 per unit picked up from X, whereas external suppliers supply at Y's factory at the stated price of Rs. 85 per unit.
Additional information is given below:
Figures Rs/unit
X Y Z
Direct materials (external supplier rate) 40 85 135
Direct labour 30 50 45
Sales Agent's commission 15 15 10
Selling price in external market 110 170 240
Production capacity (units) 20,000 30,000 40,000
External demand (units) 14,000 26,000 42,000
You are required to discuss the range of negotiation for Managers X,Y and Z for the number of units and the transfer price for internal transfers.
Answer:
Analysis of range of negotiation for manager of Division X
(Figures in Rs.)
(a) Division X
Outside sales Sales to Y (Range)
Selling price 110 70 ---- 79
(-) Commission 15 -- --
Net selling price 95 70 79
Variable Cost 70 70 70
Contribution per unit 25 0 9
Units 14,000 6,000 6,000
Total contribution
(Units X contribution per unit) 3,50,000 0 54,000
Analysis of Range of negotiation for Manager of Division Y
Division Y
Outside sales Sale to Z
From A From outside From A From outside
Price range ---- 70 79 85 70 79 85
Add: Transport 6 6 -- 6 6 --
76 85 85 76 85 85
Add: Direct labour 50 50 50 50 50 50
126 135 135 126 135 135
Add: Delivery cost 10 10 10 8 8 8
136 145 145 134 143 143
Add: Sales commission 15 15 15 - - -
Total cost 151 160 160 134 134 143 143
Selling price 170 170 170 134 135 135 135
Contribution 19 10 10 0 +1 -8 -8
Range of negotiation:
Manager of Division X will sell 14,000 units outside at 110 per unit and earn a contribution of Rs.3.5 lakhs.
Excess capacity of 6,000 units can be offered to Y at a price between 70( Th variable manufacturing cost at X) and Rs.95 (the maximum amount to equal outside contribution). But Y can get the material outside @ 85. So, Y will not pay to X anything above (Rs.85 -6) = Rs.79 to match available external price.
X will be attracted to sell to Y only in the range of 71 – 79 Rs.per unit at a volume of 6,000 units. At Rs.70, X will be indifferent, but may offer to sell to Y to use idle capacity.
Z will not buy from Y at anything above Rs.135. If X sells to Y at 70 per unit, Y can sell to Z at 134 and earn no contribution, only for surplus capacity and if units transferred by X to Y at Rs.70 per unit.
| Y | Z |
Provided X sells to Y at Rs.70 per unit | Sells 4,000 units to Z at 134(Indifferent) | Buy 4,000 units from Y at 134(attracted) |
Sells 4,000 units to Z at 135 (Willing for a contribution of Re.1) | Indifferent, since market price is also 135 |
For buying from X at 71-79 price range, Y will be interested in selling to Z only at price 136-143, which will not interest Z.
Thus Y will sell to Z only if X sells to Y at Rs.70 per unit and Y will supply to Z maximum 4,000 units.