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Case 6-1
Transfer Pricing Problems
Problem 1: Calculate the transfer price for Product X and Y and the
standard cost for Product Z.
a. For Product X:
Standard cost = Material Purchased Outside + Direct labor + Variable overhead + Fixed
overhead per unit
= $2.00 + $1.00 + $1.00 + $3.00
= $7.00
Transfer price = standard cost + 10% return on inventories and fixed assets
= $7.00 + $1.00
= $8.00
b. For Product Y:
Standard cost = Material Purchased Outside + Direct labor + Variable overhead + Fixed
overhead per unit + transfer price of X
= $3.00 + $1.00 + $1.00 + $4.00 + $8.00 = $17.00
Transfer price = standard cost + 10% return on inventories and fixed assets
= $17.00 + $0.6
= $17.6
c. For Product Z:
Standard cost = Material Purchased Outside + Direct labor + Variable overhead + Fixed
Problem 2: Calculate the transfer price for Product X and Y and the
standard cost for Product Z (with additional information)
a. For Product X:
Standard variable cost = Material Purchased Outside + Direct labor + Variable overhead
Monthly charge = fixed costs +10% return on inventories and fixed assets
= $3.00 + 0.1 [(30,000+70,000)/10,000]
= $4.00
b. For Product Y:
Standard variable cost = Material Purchased Outside + Direct labor + Variable overhead +
Transfer price of X
= $3.00 + $1.00 + $1.00 + $8.00
= $13.00
Monthly charge = fixed costs + 10% return on inventories and fixed assets
= $4.00 + 0.1 [(15,000+45,000)/10,000]
= $4.60
Unit standard cost = Variable cost + Fixed cost = $13.00 + $4.00 = $17.00
c. For Product Z:
Standard variable cost = Material Purchased Outside + Direct labor + Variable overhead +
Transfer price of Y
Vikram Rana, PDM-03-027
So, no matter how much is the possible competitive price, when the company maintain its
price at $28.00, it can get more profit than follow the possible competitive price.
Because the answer to the Problem 2 is the same as the answer to the
Problem 1, so the answer to this question is the same as the question 3 (a).
Maintaining the price at $28.00, the company can get more profit.
c. Which decisions are to the best economic interests of the company, other
things being equal?
From the question 3 (a) and 3 (b), no matter which method the company use to calculate the
cost, when the company maintains the price at $28.00, the company can maximum the profit.
No. The goal to the company is maximum its profit, and as our calculated, when the
company maintains its price at $28.00, it can get the most profit, so the manager has acted in
the best interest of the company.
If the company follows the competitive price, the opportunity losses are shown as followed:
1. The possible competitive price is $27.00, opportunity loss = 39,600-34,000 = $5,600
2. The possible competitive price is $26.00, opportunity loss = 30,800-24,000 = $6,800
3. The possible competitive price is $25.00, opportunity loss = 22,000-14,000 = $8,000
4. The possible competitive price is $23.00, opportunity loss = 8,800-(-6,000) = $14,800
5. The possible competitive price is $22.00, opportunity loss = 0-(-16,000) = $16,000