2019-01-25T10:51:42+00:00 Assignments

TRANSFER PRICING

This paper concentrates on the primary theme of TRANSFER PRICING in which you have to explain and evaluate its intricate aspects in detail. In addition to this, this paper has been reviewed and purchased by most of the students hence; it has been rated 4.8 points on the scale of 5 points. Besides, the price of this paper starts from £ 40. For more details and full access to the paper, please refer to the site.

TRANSFER PRICING

Question: TRANSFER PRICING

Calculus Ltd is a manufacturer of retail till scanner screens and fully assembled scanners which it distributes to wholesalers around the country. Department A manufactures the scanner screens, and Department B assembles the complete scanners. Currently Department B purchases the scanner screens from an outside supplier.

DEPARTMENT A

Department A currently manufactures 10 000 scanner screens per month. Calculus Ltd is currently considering buying the scanner screens from an outside supplier. The total budgeted costs per month to manufacture 10 000 scanner screens are as follows:

R

Direct raw material 800 000

Direct labour 500 000

Variable manufacturing overheads 200 000

Fixed manufacturing overheads 100 000

Allocated corporate expenses 100 000

Additional information:

1. An outside supplier has offered to supply Calculus Ltd with 10 000 scanner screens at a price of R165 per scanner screen.

2. Direct raw material are avoidable if the offer is accepted.

3. The direct labour employed in Department A will become redundant if the offer is accepted. Department A will incur redundancy costs of R50 000 before they close down.

4. Variable manufacturing overheads are avoidable if the offer is accepted.

5. Fixed manufacturing overheads will be reduced by R50 000 in total in the month of acceptance of the offer.

6. Allocated corporate expenses per month for Department A will reduce by 20% if the offer is accepted. The total expenses for the company will, however, remain the same.

7. Department A currently sells all 10 000 scanner screens to the outside market at a selling price of R200 per scanner screen.

DEPARTMENT B

Department B assembles the complete retail scanners using the scanner screens and other direct raw material. The department uses a standard absorption costing system for planning and control purposes. The standard per unit is as follows:

R

Selling price 450

Direct material – Screens (1 kg) 160

Direct material – Other (2 kg) 50

Direct labour 80

Variable manufacturing overheads 40

Fixed manufacturing overheads 50

The budgeted allocated corporate expenses for the month of August were R300 000.

The budgeted monthly sales units for the department are 10 000 retail scanners.

The actual results for August 2016 were as follows:

Actual production and sales units 8 000

Selling price (per unit) R460

Direct material – Screens per unit (1 kg) R180

Direct material – Other per unit (2,5 kg) R40

Direct labour per unit R65

Variable manufacturing overheads per unit R45

The total fixed manufacturing overheads for the month of August 2016 were R490 000.

Allocated corporate expenses were R320 000.

There was no opening or closing inventories of direct raw material and finished scanners. MAC3701/2016

5

TRANSFER PRICING

Calculus Ltd is considering the possibility of transferring all the scanner screens manufactured by Department A to Department B. Department B currently buys all the required scanner screens from an outside supplier at a cost of R155 per unit, plus delivery cost per unit of R5. Department A sells all the screens it manufactures to external customers. The two departments are managed by independent management teams, and the performances of these teams are evaluated independently.

REQUIRED: (a)Determine if Department A should continue to manufacture the scanner screens or whether they should purchase them. Show all your workings. Ignore any qualitative factors.(9)
(b)Briefly discuss five non-financial factors that Calculus Ltd should consider before deciding to purchase the scanner screens from the outside supplier.(5)
(c)Calculate the following variances for Department B for the month of August 2016. Ignore the possibility of transfer pricing:

(i) Sales margin price variance.

(ii) Direct raw material purchase price variance – Screens.

(iii) Direct raw material usage variance – Other.

(iv) Variable manufacturing overheads expenditure variance.

(v) Fixed manufacturing overheads volume variance.

(3)

(3)

(3)

(2)

(2)

(d)Briefly comment on the possible reasons for the following variances:

(i) Sales margin price variance.

(ii) Direct raw material purchase price variance – Screens.

(iii) Direct raw material usage variance – Other.

(iv) Fixed manufacturing overheads volume variance.

(2)

(2)

(2)

(2)

(e)Determine the minimum transfer price at which Department A will be willing to sell the scanner screens to Department B.(5)
(f)Determine if Calculus Ltd should introduce the transfer pricing system. Assume the suggested transfer price is R170 per unit, and all other costs will be as budgeted per unit.

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