solutionfortransferpricing - a Wholesale price Div A...

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a) Elite Extreme Excel Wholesale price $ 80 $ 120 $ 180 Div A variable costs 20 30 60 Div B variable costs 40 40 50 Total variable costs 60 70 110 [1.5 marks] Total contribution 20 50 70 [1.5 marks] Div A share of contribution 10 25 35 [1.5 marks] Transfer price from Div A to Div B* 30 55 95 [1.5 marks] *Division A variable costs plus Division A share of contribution earned. (6 marks) b) Generally, transfer price is used to allocate a proportion of the overall profits to the respective divisions. This will enable the division to act as a profit center and can motivate staff for efficiency and productivity. i) Transfer price can be based on other factors such as labour costs to reflect the value added by employees based on their skills which is presumably proportionate to the earnings. [2 marks] ii) Transfer price can also be based on variable costs of the division to reflect the overall responsibilities of that department in handling all controllable resources under their responsibility efficiently. [2 marks] (4 marks) c) Ranking the preference in production: Elite Extreme Excel Total contribution from (a) $20 $50 $70 [1.5 marks] Labour hours needed 5 hours 5 hours 8 hours [1.5 marks] Contribution per labour hour $4 $10 $8.75 [1.5 marks] Ranking 3 1 2 [1.5 marks]
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Utilisation of limited resources Hours Extreme 500 units @ 5 hours 2,500 [0.5 mark] Excel 100 units @ 8 hours 800 [0.5 mark] Elite 340 units @ 5 hours 1,700 [0.5 mark] Limitation of labour hours available 5,000 [1 mark] Monthly production schedule with contribution $ Extreme 500 units @ $50 25,000 [1 mark] Excel 100 units @ $70 7,000 [1 mark] Elite 340 units @ $20 6,800 [1 mark] Maximum total contribution per month 38,800 [0.5 mark] (12 marks) (Total: 22 marks)
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