Case 6-1

Case-study 6-1 : Transfer Pricing

Illustration - I

Solution : Lambda Company

For Product X

•Standard cost = Material Purchased Outside+ Direct labor +Variable overhead+ Fixed overhead per unit

•=2+1+1+3=7

10 percent return on inventories and fixed assets=0.1×[（ 30,000+70,000)/10,000]=1

Transfer price = 7+1 = 8

For Product Y

Standard cost= Material Purchased Outside+ Direct labor +Variable overhead+ Fixed overhead per unit+ Transfer price of X

•=3+1+1+4+8=17

10 percent return on inventories and fixed assets=0.1×[（ 15,000+45,000)/10,000]=0.6

Transfer price=17+0.6=17.6

•For Product Z:

Standard cost= Material Purchased Outside+ Direct labour +Variable overhead+ Fixed overhead per unit+ Transfer price of Y

=1+2+2+1+17.6=23.6

Illustration - II

Problem 2 - Lambda Company (with

additional information)

For Product X

•Standard variable cost =Material Purchased Outside+ Direct labor +Variable overhead =2+1+1=4

Monthly charge=fixed costs+10 percent return on inventories and fixed assets

=3+0.1×[（30,000+70,000） /10,000]=4

Transfer price= 4+4=8

For Product Y

•Standard variable cost =Mat Purchased Outside+ Dir lab+VOH+ Transfer price of X =3+1+1+8=13

Monthly charge=FC+ 10 percent return on inventories and FA =4+10%×[（15,000+45,000） /10,000]=4.6

Transfer price=13+4.6=17.6

Unit standard cost = Variable cost+ Fixed cost

= 13+4=17

•For Product Z:

Standard cost =Material Purchased Outside+ Direct labor +Variable overhead+ Fixed overhead per unit+ Transfer price of Y=1+2+2+1+17.6=23.6

Illustration : III

Solution

Under possible competitive price $26.00

If company maintain the price at $28, the profit=(28-23.6) ×7,000=30,800

If company follow the possible competitive price at $26, the profit= (26-23.6) ×10,000=24,000

Under possible competitive price $27.00

•If company maintain the price at $28, the profit=(28- 23.6) ×9,000=39,600

If company follow the possible competitive price at $27, the profit= (27-23.6)...