Question

Fruities Ltd has two divisions, Durian Division and Juice Division. Durian Division has an annual capacity of 10 000 units of durian juice concentrate. Juice Division's annual requirement of durian juice concentrate is 8000 units. The variable production cost of one unit of durian juice concentrate at Durian Division is $6, but the division incurs $1 additional shipping cost per unit when selling to external suppliers. The market price for the division's durian juice concentrate is $10 per unit, and currently, the external demand for Durian Division's durian juice concentrate is 5000 units. Using the transfer pricing formula, Durian Division should charge the Juice Division:

Answer 1

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Capacity of Durion Division		10,000	Units
External Demand		5,000
Units remaining for internal transfer		5,000
Hence, price to be charged:
		First 5000 Units	Next 3000 Units	Total
Variable Cost		$                 6.00	$                  6.00
Add: Contribution Lost from External sale	$10-$6-$1	$                      -	$                  3.00
Transfer price	a	$                 6.00	$                  9.00
Units to be transferred	b	5,000	3,000	8,000
Total Price to be paid	a*b	$             30,000	$              27,000	$ 57,000
Per unit Transfer Price $57,000/8,000 units				$      7.13