Pricing Decision

Q.1 A company has three departments; Department A, Department B and Department C. The
finished product of Department A is the raw material for Department B and Department C is an
independent department with indigenous product. All the departments are under decentralized
conditions, and have their autonomy in decision making. Therefore, Department A either can
sell its product to department B or in the open market. The variable manufacturing cost of
Department A is Rs.200 and its selling price in the market is Rs.240. Similarly, Department B
can wither buy product from the market or receive a transfer from Department A. The market
price of the raw material used in Department B is also Rs.240. Department C also buys the raw
material needed for the department from the same supplier from which B receives its raw
materials at a reduced price of Rs.20 per unit. The regular market price of the raw materials
required for Department C is Rs.40. The supplier will also cease to supply the raw material
needed for Department C, if Department B receives transfer from Department A.
Required:
1. Transfer price under the condition of access capacity
2. Transfer price under capacity constraint
Q. 2 Kasthamandap Window Manufacturing Company manufactures windows for home-
building industry. The window frames are produced in the Frame Division. The frames are then
transferred to the Glass Division, where the glass and hardware are installed. The company's
best-selling product is a three-by-four-foot, double-paned operable window.
The frame Division can also sell frames directly to custom home builders who install
the glass and hardware. The selling price for a frame is Rs.125. The Glass Division sells its
finished windows for Rs.280. The markets for both the frames and finished windows exhibit
perfect competition.
The standard cost of the window is detailed as follows:
Frame Division Glass Division
Direct material Rs.30 Rs.50*
Direct labor 30 30
Variable overhead 40 40
Total Rs. 100 Rs. 120
* Excluding the transfer price for the frame.

Required
a. Assuming that there is no excess capacity in the Frame Division, compute the transfer price
for the window frames using the general rule.
b. Assuming that there is enough excess capacity in the Frame Division; compute the transfer
price for the window frames using the general rule.
c. Suppose the predetermined fixed-overhead rate in the Frame Division is 40 percent of the
direct-labor cost. Calculate the transfer price if it is based on standard full cost plus a 10
percent markup.
d. Assume that the transfer price established in requirement (c) is used. The Glass Division
has been approached by the Nepal Army with a special order for 1,000 windows at Rs.235.
 From the perspective of the Window Company as a whole, should the special order be
accepted or rejected? Why?
e. Assume the same facts as in requirement (d). Will an autonomous Glass Division manager
accept or reject the special order? Why?
Q.3 Global Board Marker Company manufactures board markes. The ink used to produce
board marker is produced in Alpha Division. The ink is then transferred to the Beta Division
where the finished marker is produced. The Alpha division can also sell ink refill directly to
other producers and reusers of board markers. The sales price for refill ink is Rs.8. The Beta
division sells its finished marker for Rs.30. The market for both ink and board markers exhibit
perfect competition. The standard cost of the4 ink and marker is detailed as follows:
Alpha Division Beta Division

Direct material Rs.2 Rs.6*

Direct labor 2 5
Variable overheads 1 6
Total Rs.5 Rs.17
*Not included the transfer price for the ink.
Recommend:
a) Use the general rule to compute the transfer price for Alpha’s ink, assuming there is no
excess capacity in Alpha Division.
b) Calculate the transfer price if it is based on standard variable costs with a 10% of mark up.
c) Use the general rule to compute the transfer price for Alpha’ ink, assuming there is excess
capacity in Alpha Division.
d) Suppose predetermined fixed overhead rate in Alpha division is 50% of direct labor.
Calculate the transfer price if it is based on standard full cost plus a 10% mark up.
Assume the transfer price established in requirement (d) is used. Mahendra Mutliple campus has approached the Beta devision
with a special order for 2000 board markes at Rs 25. From the prospective of Global Company as a whole, should the special
order be accepted or rejected? Why? Assume Alpha and Beta both have excess capacity

Q4. Easy Living Industries manufactures carpets, furniture and cushions in three separate
divisions. The company's operating statement for 2004 is as follows:
Easy Living Industries, Operating Statement
For the Year Ended December 31, 2004
Carpet Division Furniture Cushion Total
Division Division
Sales revenue Rs.3,000,000 Rs.3,000,000 Rs. 3,800,000 9,800,000
Cost of goods sold (all 2,000,000 1,300,000 3,000,000 6,300,000
variable)
Gross Profit Rs.1,000,000 Rs.1,700,000 Rs.800,000 3,500,000
Operating expenses:
Administration (all fixed) Rs.300,000 Rs.500,000 Rs.400,000 1,200,000
Selling (50% variable) 600,000 600,000 500,000 1,700,000
Total operating expenses Rs. 900,000 Rs. 1,100,000 Rs. 900,000 2,900,000
Income (loss) from Rs. 100,000 Rs.600,000 (Rs.100,000) Rs.600,000
operation
Required
a. One of the Furniture Division's inputs is the output of Carpet Division. What price
should the Carpet Division charge for its product to the Furniture Division if (i) the
Carpet Division has excess capacity (ii) it has no excess capacity?
b. The CEO of Easy Living Industries believes that the total income could be increased
dropping the Cushion Division, as it is giving negative income. Is CEO correct? Show
the differential cost-benefit analysis to justify your opinions.
Q.4 Kathmandu Television Ltd. has two independent divisions: Tube and television divisions.
Television division produces and sales television in the market and tube division manufactures
LDC tubes which could be used in production of television. The variable manufacturing cost of
would be Rs.250 and they could be sold in the market at a price of Rs.300. The television
division either could receive LDC tubes from the tubes division or purchase it from a supplier
at a price of Rs.300. The supplier would also life the scraps of tube division at a price of Rs.25
per unit and it would stop buying scraps if, television would receive LDC tubes from tube
division.
Required:
a) Transfer price of LDC tubes to television divisions where no capacity constraint exists.
b) Transfer price where capacity constraint exists.
Q.5 The electronics Ltd. has three autonomous units viz. Circuit designing, television manufacturing and refrigerator
manufacturing, enjoying full autonomy. The television manufacturing unit either could buy the circuit it would need to produce
television, from the circuit designing unit or from a whole seller. The whole seller also supplies 'Thermostat' needed for the
manufacturing of refrigerator. If the television manufacturing unit would purchase required circuits from circuit designing unit
the wholesaler would also stop the supply of 'thermostat'. The further details other than mentioned above have been
summarized below:
Circuit designing unit Television manufacturing Refrigerator manufacturing unit
unit
(a) Transfer pricing (a) Buying cost from whole (a) Buying cost of Thermostat from
(SP) cost plus 25% seller Rs. 300 per unit whole seller Rs. 50
(b) Cost of production Rs. (b) Buying cost from open market
240 per unit Rs. 80
Required:
a. Transfer pricing with no capacity constraints.
b. Transfer pricing with capacity constraints. (TU 2057)
Q.7 A company has there divisions ; X, Y and Z. Division X can buy a part from division Y or
from external company , which will meet Y’s market price of Rs. 20 per unit. If X buys from A
co., A co. in terms buys a component from division Z for Rs. 4 per unit. The outlay costs to
division Z of supplying their component are Rs. 2 per unit. In filling X’s order, Y would incur,
outlay costs of Rs. 16.5 per unit. Assume that division Y is working at full capacity and can
provide to an outside buyer (i.e. company A) at the same market price of Rs. 20 per unit and
with the same outlay costs of Rs. 16.5 per unit.
Required:
a. What alternative would be the best for company as a whole buying from company A or
division Y? Show supporting calculations.
b. What transfer price should be used to guide the manager of division X and Y so as to
maximize overall net income (cash flow)?
c. Suppose that division Y has enough extra capacity to supply to both division X and the
outside buyer at the same time. How would this change your answer in part (i) and (ii) ?
Show supporting calculation.