Question

Sampson Ltd has two divisions. The Forming Division produces moulds, which are then transferred to the Finishing Division. The moulds are further processed by the Finishing Division and are sold to customers at a price of $300 per unit. The Forming Division is currently required by Sampson Ltd to transfer its total yearly output of 100 000 moulds to the Finishing Division at 120% of full manufacturing cost. Unlimited numbers of moulds can be purchased and sold on the outside market at $180 per unit.

The following table gives the manufacturing cost per unit in the Forming and Finishing divisions for 2019:

	Forming Division	Finishing Division
Direct materials cost	$24	$12
Direct manufacturing labour cost	17	20
Manufacturing overhead cost	64a	50b
Total manufacturing cost per unit	$105	$82

^aManufacturing overhead costs in the Forming Division are 20% fixed and 80% variable.

^bManufacturing overhead costs in the Finishing Division are 65% fixed and 35% variable.

Calculate the operating profits for the Forming and Finishing divisions for the 100 000 moulds transferred under the following transfer-pricing methods: (a) market price and (b) 120% of full manufacturing cost.

Answer 1

(a) Market Price i.e. $180 per unit

	Forming Division	Finishing Division
Sales Revenue	$ 18,000,000	$   30,000,000
Costs
Direct Material	$    2,400,000	$     1,200,000
Transferred in from Forming Division		$   18,000,000
Direct Manufacturing labor	$    1,700,000	$     2,000,000
Manufacturing Overhead	$    6,400,000	$     5,000,000
Total Costs	$ 10,500,000	$   26,200,000
Operating Profits	$   7,500,000	$     3,800,000

(b) 120% of full manufacturing cost i.e. $105 x 1.20 = $126 per unit

	Forming Division	Finishing Division
Sales Revenue	$ 12,600,000	$   30,000,000
Costs
Direct Material	$    2,400,000	$     1,200,000
Transferred in from Forming Division		$   12,600,000
Direct Manufacturing labor	$    1,700,000	$     2,000,000
Manufacturing Overhead	$    6,400,000	$     5,000,000
Total Costs	$ 10,500,000	$   20,800,000
Operating Profits	$   2,100,000	$     9,200,000

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