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Category: Business and Industry
Date Submitted: 03/15/2014 11:22 PM
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)...