Reference no: EM132533723

Within the Luxottica Group, Barberini SpA manufactures lenses for use by others within the Luxottica Group. Barberini also sells lenses to customers external to the group. The following question presents hypothetical data concerning Barberini's internal and external sales of lenses.

Relevant revenue, cost and other information associated with the production of lenses by Barberini is provided below:

External selling price $65.00 per pair

Direct materials          $12.50 per pair

Direct labour                $10.00 per pair

Variable overhead          $10.00 per pair

Fixed overhead               $7.50 per pair

Sales commission for external sales $2.00 per pair

Required

Measure and discuss the transfer price for lenses for internal sales between Barberini to other members within the Luxottica Group under the following scenarios:

Question 1 : The transfer price is set using negotiated transfer pricing

Question 2 : The transfer price is set using variable cost with a 20% mark-up

Question 3 : The transfer price is set using absorption costing with a 15% mark-up

Question 4 : The transfer price is set using the general transfer price rule and Barberini has unlimited capacity

Question 5 : Barberini has capacity to produce 100,000 pairs per month. Demand from internal customers is 100,000 pairs per month and demand from external customers is 20,000 pairs per month .

Question 6 : Barberini has capacity to produce 100,000 pairs per month. Demand from internal customers is 90,000 pairs per month and demand from external customers is 20,000 pairs per month .

Question 7 : Assume that the transfer price for lenses was set using the market price and that an external supplier has offered one of the assembly departments within the Luxottica Group to supply lenses for $55.00 per pair. Would it be in the interests of the assembly department to accept this offer? In what situations would accepting this offer be in the best interests of the Luxottica Group as a whole?

Question 8 : Identify and discuss an optimal transfer price policy for the internal sale of lenses by Barberini. Outline three key factors which make this an appropriate transfer price policy