MFA 700 ADVANCED AND

MANAGERIAL
ACCOUNTING
Assignment 3

25TH MAY 2015

HANEEN SULEIMAN
20141028

Question1
Atransferpriceisthepricechargedbyasubunitforaproductoraservicesoldtoanother
subunitinternallywithinthesameorganization.Transferpricesseektopromotegoal
congruence,motivatemanagereffort,helpevaluatesubunitperformanceandpreservesubunit
autonomy.
Theoverallcompanyprofithasreducedby550,000asshownbelowwhichisthefirstissue,this
impliesthatthechosenpricingmethodisinefficientandsolvedtheminorissuesofthetwo
purchasingdivisions.Themediatordecisiondidntpromotegoalcongruence.
Anotherissuecouldbethelackofinformationsincenothingaboutthepurchasingdepartments
activitiesismentionedforexamplewhatistheirsellingproductsorwhatvaluedotheyaddtothe
products?Andhowisitbeingsold?
Inadditiontothatthemediatorwasntagoodnegotiatorhejusttookquickdecisionsbasedon
theissuesoftwodivisions,hedidntconductgoodresearchorchooseaspecificsuitablemethod.
Profit of Eastern
Division based on
original agreement
Product

Per unit
X
Y

Total
X

3,000.
00

1,000.
00

1,000.
Profit
of Eastern
Transfer
price Division
00
based on revised agreement

2,000.
00

Quantity

Product
Direct materials
Quantity
Transfer
Directprice
labour
Direct
materials
Variable
overhead
Budgeted fixed
overhead cost
Direct labor

3,000,000
.00

Per unit 600,000.0

200.00X 300.00 0Y

2,000,000.00
Total
X
300,000.00

2,000.00
500.00
600,000.0
200.00 300.00 0
300,000.00
1,000.00
2,000.00
2,000,000 1,000,000.
.00
00
900,000.0
300.00 600.00 0
600,000.00
200.00
300.00
400,000.0 150,000.0
4,200.00 0 5,200.00 0
200.00

300.00
400,000.0 150,000.0
895,800.0
0 794,800.00
0
0

300.00

600.00

Profit
Variable overhead
Budgeted fixed overhead
cost
Profit

600,000.0
300,000.0
1,690,600.00
0
0
4,200.00

5,200.00

595,800.0
0

394,800.0
0
990,600.
00

Decreas
- e in
700,000.00 profit

Difference between original

profit and revised profit

Costs for North division based on original

agreement
Purchasin
g
Eastern division external supplier
Quantity
3,000
1,000
Price
1,000
900
Cost

3,000,000.00

900,000.00
3,900,000.00

Costs for North division based on revised

agreement
Purchasin
g
Eastern division external supplier
Quantity
2,000
2,000
Price
1,000
900
Cost
2,000,000.00
1,800,000.00
3,800,000.00
Difference
between original
costs and revised
costs

(100,000.0
0)

Decrease in costs which implies that profits will

increase by the same amount

Costs for South division based on original

agreement
Purchasin
g
Eastern division external supplier
Quantity
1,000
1,000
Price
2,000
1900
Cost
2,000,000.00
1,900,000.00

3,900,000.00
Costs for South division based on revised
agreement
Purchasin
g
Eastern division external supplier
Quantity
500
1,500
Price
2,000
1900
Cost
1,000,000.00
2,850,000.00
3,850,000.00
Difference between
original costs and
revised costs

(50,000.00)

Decrease in costs which implies that profits will increase

by the same amount

Question2
Evaluatetheimplicationsofthefollowingtransferpricingpoliciesoneachofthethreedivisions:
Transferprice=absorptioncostplusa20%markupforthesellingdivision

Usingapercentageoftotalproductcost(variable+fixed)tosetthetransferpricethe
implicationsconcludedwerethatthecompanysprofitchangewaszeroasaresultofadecrease
inEasterndivisionsprofitby1,028,720andadecreaseincostsoftheothertwodivisionsof
474,960and553,760thismeansanincreaseinprofitassumingthatthesalesofbothdivisions
remainsconstant.
Absorption cost plus a 20% mark-up for the selling division
Eastern Division
Product
X
Costs
701.40
Markup percentage
20%
Transfer Price
841.68
Profit per unit
140.28
420,840.
Total Profit
00

Y
1,205.20
20%
1446.24
241.04
241,040.00
661,880.0
0

Difference between
original profit and 20%
markup pricing

Purchasin
g
Quantity
Price
Cost

North Division
Eastern
division
3,000.00
841.68
2,525,040.00

Difference between
original costs and
20% markup pricing
costs

(1,028,720.0
0)

Decrease in
profit

external
supplier
1,000.00
900.00
900,000.00
3,425,040.00

(474,960.
00)

Decrease in costs which implies an

increase in profit by the same
amount

South Division

Purchasin
g
Quantity
Price
Cost

Eastern
division
1,000.00
1,446.24
1,446,240.00

external supplier
1,000.00
1,900.00
1,900,000.00
3,346,240.00

Difference between
original costs and 20%
markup pricing costs

(553,760.00)

Decrease in costs which

implies an increase in profit
by the same amount

Transfer price = incremental cost per unit

Transfer Price = Incremental Cost per Unit incurred up to the point of transfer + Opportunity cost
per unit to the selling subunit.
This method resulted in an overall increase in profit by 9,400 resulted from an increase in profit of
Eastern division and a decrease in the other divisions profit. Explained below
incremental cost per unit
Eastern Division
Product
X
Variabl Costs
700.00
Incremental cost
per unit
700.00
Opportunity Cost
per unit
900.00
Transfer Price
1,600.00
Profit per unit
900.00
Total Profit
2,700,000.00

Difference between
original profit and
incremental cost
pricing

Y
1,200.00
1,200.00
1,900.00
3,100.00
1,900.00
1,900,000.00
4,600,000.00

2,909,400.00

Increase in
profit

North Division
Purchasi
ng

Eastern division

external supplier

Quantity

3,000.00

1,000.00

Price

1,600.00

900.00

Cost

4,800,000.00

900,000.00
5,700,000.00

Difference between
original profit and
incremental cost
pricing

1,800,000.00

increase in costs which implies

an decrease in profit by the same
amount

South Division
Purchasin
g
Quantity
Price
Cost

Eastern division
1,000.00
3,100.00
3,100,000.00

Difference between
original profit and
incremental cost
pricing

external supplier
1,000.00
1,900.00
1,900,000.00
5,000,000.00

1,100,000.00

increase in costs which implies

an decrease in profit by the same
amount

Transfer price = a negotiated price of 950forProductXand1,950forproductY.

Thismethodresultedinnochangeintheoverallprofitresultedfromadecreaseinprofitofthe
EasternDivisionandanincreaseinprofitsoftheothertwodivisionsshownbelow:
a negotiated price of 950 for Product X and
1,950 for product Y
Eastern Division
Product
X
Costs
701.40
Negotiated price
950.00
Profit per unit
248.6
745,800.0
Total Profit
0

Difference between
original profit and
negotiated price
profit

Y
1,205.20
1,950.00
744.8
744,800.00
1,490,600
.00

(200,000.00)

Decrease in
profit

Purchasi
ng
Quantity
Price
Cost

Difference between
original costs and
negotiated price
costs

(150,000.00)

Purchasi
ng
Quantity
Price
Cost

Difference between
original costs and
negotiated price
costs

North Division
Eastern
external
division
supplier
3,000.00
1,000.00
950.00
900.00
2,850,000.00
900,000.00
3,750,000.00

Decrease in costs which implies

an increase in profit by the
same amount

South Division
Eastern
external
division
supplier
1,000.00
1,000.00
1,950.00
1,900.00
1,950,000.00
1,900,000.00
3,850,000.00

(50,000.00)

Decrease in costs which implies

an increase in profit by the
same amount