Question

Topic: Transfer of pricing

Uninder Corporation produces automobile parts and it primarily sells parts to external customers. One of its subsidiary companies uses a part which can be produced by Uninder Corporation and it requires 10,000 units annually. Uninder Corporation has no idle capacity. The subsidiary company has a bid from an external supplier for the parts at £31.00 per unit. The variable production costs for these parts would amounts to £12.00 per unit. Packaging and shipping costs for the part would be only £2.00 per unit. To fill the order from the subsidiary company, Uninder should give up the production of another part, TW3. It sells the part for £35.00 per unit, and requires £13.00 per unit in variable production costs. Packaging and shipping costs for TW3 would be only £3.00 per unit. The company is producing and selling 50,000 units of the TW3 each year. The production and sales of the TW3 would drop by 10% if the part is produced for the subsidiary company.

Required

1. Calculate the minimum price that would be acceptable for the Uninder Corporation to retain the present profit.
2. Calculate the opportunity cost per unit for the Uninder Company
3. If the lowest acceptable transfer price to the selling division is £90 and the lost contribution margin per unit on outside sales is £40, determine the variable cost per unit.

Answer 1

a & b	Minimum price and the opportunity cost
	Cost of production and selling of automobile parts
	Variable cost for the production				120000
	Shipping cost				20000
	Opportunity cost for TW 3				95000
	Minimum price to retain the same				235000
	level of the profit
	Per unit				23.5
	Note
	The company is currently producting and selling TW 3 of 50000 units in the market
	However, there would be a drop of 10% if the company sells excess units of automobile partks
	So, 5000 units would not be produced
	Opportunity cost per unit
	SP		35
	Less: Variable cost
	Production cost		13
	Selling cost		3
			16
	Contribution per unit		19
	Total contribution lost over 5000 units				95000
c	Variable cost per unit
	Transfer lowest acceptable				90
	Margin cost lost				40
	Variable cost per unit				130