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Illustration - I
For Product Y
Standard cost= Material Purchased Outside+ Direct labor +Variable overhead+ Fixed overhead per unit+ Transfer price of X =3+1+1+4+8=17 10 percent return on inventories and fixed assets=0.1[ 15,000+45,000)/10,000]=0.6 Transfer price=17+0.6=17.6
For Product Z: Standard cost= Material Purchased Outside+ Direct labour +Variable overhead+ Fixed overhead per unit+ Transfer price of Y =1+2+2+1+17.6=23.6
Illustration - II
For Product Y
Standard variable cost =Mat Purchased Outside+ Dir lab+VOH+ Transfer price of X =3+1+1+8=13 Monthly charge=FC+ 10 percent return on inventories and FA =4+10%[15,000+45,000 /10,000]=4.6 Transfer price=13+4.6=17.6 Unit standard cost = Variable cost+ Fixed cost = 13+4=17
For Product Z: Standard cost =Material Purchased Outside+ Direct labor +Variable overhead+ Fixed overhead per unit+ Transfer price of Y=1+2+2+1+17.6=23.6
Illustration : III
Solution
Under possible competitive price $26.00 If company maintain the price at $28, the profit=(28-23.6) 7,000=30,800
If company follow the possible competitive price at $26, the profit= (26-23.6) 10,000=24,000
Under possible competitive price $27.00 If company maintain the price at $28, the profit=(2823.6) 9,000=39,600
If company follow the possible competitive price at $27, the profit= (27-23.6) 10,000=34,000
Solution
Under possible competitive price $25.00 If company maintain the price at $28, the profit=(28-23.6) 5,000=22,000
If company follow the possible competitive price at $25, the profit= (25-23.6) 10,000=14,000
Under possible competitive price $23.00 If company maintain the price at $28, the profit=(28-23.6) 2,000=8,800
If company follow the possible competitive price at $23, the profit= (23-23.6) 10,000=-6,000
Solution
Under possible competitive price $22.00 If company maintain the price at $28, the profit =(28-23.6) 0=0
If company follow the possible competitive price at $22, the profit = (22-23.6) 10,000=-16,000
b) With the transfer prices calculated in Problem 2, is Division C better advised to maintain its present price at $28.00 or to follow competition in each of the instances above? Answer- Because the answer to the Problem 2 is the same as the answer to the Problem 1, so the answer to this question is the same as the question 3 (a). Maintaining the price at $28.00, the company can get more profit.
c) Which decisions are to the best economic interests of the company, other things being equal?
Answer- From the question 3 (a) and 3 (b), no matter which method the company use to calculate the cost, when the company maintains the price at $28.00, the company can maximum the profit.
d) Using the transfer prices calculated in Problem 1, is the manager of Division C making a decision contrary loss to the company in each of the competitive pricing actions described above? Answer- No. The goal to the company is maximum its profit, and as per calculation, when the company maintains its price at $28.00, it can get the most of profit, so the manager has acted in the best interest of the company.