TUTORIAL QUESTIONS TP_MAY2019.pdf - MAY2019 MH TRANSFER PRICING TUTORIAL TRANSFER PRICING QUESTION 1 Mekar Bhd operates two autonomous divisions X and Z

TUTORIAL QUESTIONS TP_MAY2019.pdf - MAY2019 MH TRANSFER...

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MAY2019/ MH/ TRANSFER PRICING 1 TUTORIAL: TRANSFER PRICING QUESTION 1 Mekar Bhd. operates two autonomous divisions: X and Z. Division X produces Component Tee with a ready competitive market. Division Z can use this component for its product. Currently, Division Z is selling 500 units of its product at RM2,400 per unit. The market price for the component is RM1,400 per unit. The variable cost of Division X is RM1,040 per unit, while the variable cost of Division Z, other than component costs, is RM1,200 per unit. The manager of Division Z feels that Division X should transfer Component Tee to his division at a price lower than the market because at the market price, Division Z is unable to make profit. Division X is willing to sell to Division Z at a 20 percent reduction in price. The capacity for Division X is 1,000 units, and is only able to sell 500 units in the open market. Required: a) Based on the transfer pricing rule, what should be the transfer price? b) Should the transfers be made and at what price? Explain. To support your decision, prepare a schedule showing comparisons of contribution margins for each division and the group as a whole under three different alternatives: (i) transfer price as in (a), (ii) transfer price at 20 percent reduction from market price, and (iii) no transfer. a) Discuss the effect on transfer price if Division X is able to sell all 1, 000 units in the open market. QUESTION 2 Maxwell Industries Bhd has several autonomous divisions. One of the divisions is the Electronics Division which produces an electronic device, VP-X that is used in the manufacturing of electrical products. Last year, the division operated at full capacity and sold all its 15,000 units of VP-X to the external market. The following data relates to the division’s performan ce for last year: Electronics Division RM Sales 1,500,000 Less: Cost of sales (1,200,000) Gross profit 300,000 Less: Variable selling expenses (112,500) Fixed administration expenses (75,000) Divisional net profit 112,500
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