Reference no: EM13961292
Transferor Ltd. has two processes - Preparing and Finishing. The normal output per week is 7,500 units (completed) at a capacity of 75%.
Transferee Ltd. had production problems in preparing and require 2,000 units per week of prepared material for their finishing process. The existing cost structure of one prepared unit of Transferor Ltd. at the existing capacity is as follows:
Material: $ 2.00 (variable 100%)
Labor: $ 2.00 (variable 50%)
Overheads: $ 4.00 (variable 25%)
The sale price of a completed unit of Transferor Ltd. is $ 16 with a profit of $ 4 per unit.
Contrast the effect on the profits of Transferor Ltd. for 6 months (25 weeks) of supplying units to Transferor
Ltd. with the following alternative transfer prices per unit.
i) Marginal Cost
ii) Marginal Cost + 25%
iii) Marginal cost + 15% return on capital employed. (Assume capital employed $ 20 lakhs)
iv) Existing Cost
v) Existing Cost + a portion of profit on the basis of preparing cost / total cost X unit profit
vi) At an agreed market price of $ 8.50.
Assume no increase in the fixed costs.
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