Question

Assume 200 barrels are transferred from the Production Division to the Refining Division for a transfer price of $6 per barrel. The Refining Division sells the 200 barrels at a price of $40 each to customers. What is the operating income of both divisions together? - a. $2,400- b. $2,600 $3,600 - d. $6,800 soo Answer: b Revenues = ($40 x 200)= Cost = ($3 + $2 + $10+ $12) x 200 = Operating income $8,000- 5,400 $2,600

Please explain the answer clearly

the topic of these questions above is Transfer Price.

Answer 1

TRANSFER PRICE

TRANSFER PRICE MEANS A PRICE AT WHICH ONE SUBSIDIARY DIVISION, OF THE COMPANY SELLS GOODS AND SERVICES TO OTHER SUBSIDIARY DIVISION.

TRANSFER PRICE METHODS

1. COMPARABLE UNCONTROLLED PRICE METHOD

2. RESALE PRICE METHOD

3. COST PLUS METHOD

4. TRANSACTIONAL NET MARGIN METHOD

5. TRANSACTIONAL PROFIT SPLIT METHOD

COMPARABLE UNCONTROLLED PRICE METHOD

IT COMPARES THE PRICE CHARGED FOR PROPERTY TRANSFERRED IN A CONTROLLED TRANSACTION TO THE PRICE CHARGED FOR PROPERTY TRANSFERRED IN A COMPARABLE UNCONTROLLED TRANSACTION IN COMPARABLE CIRCUMSTANCES

RESALE PRICE METHOD

IT IS ALSO CALLED RESALE MINUS METHOD. IT TAKES THE PRICE AT WHICH AN ENTERPRISE SELLS A PRODUCT TO A THIRD PARTY. THIS PRICE IS CALLED A RESALE PRICE.

RESALE PRICE IS REDUCED WITH A GROSS MARGIN. THEN THE COST RELATED WITH PURCHASE OF PRODUCT MUST BE DEUCTED. THE BALANCE IS REGARDE AS AN ARM'S LENGTH PRICE.

COST PLUS METHOD

UNDER THIS METHOD, WE MUST ADD TOGETHER THE DIRECT MATERIAL COST, DIRECT LABOUR COST, AND OVERHEAD COST FOR A PRODUCT, AND ADD TO IT A MARK UP PERCENTAGE TO GET PRICE OF THE PRODUCT.

TRANSACTIONAL NET MARGIN METHOD

IT MEASURES THE OPERATING PROFITS REALIZED FROM CONTROLLED TRANSACTIONS. THEN IT COMPARES THE PROFIT LEVEL REALIZED BY INDEPENDENT EXPENSES.

20. REVENUE ($18 ) IS EQUAL TO180% OF (4+3+2+1)

THEN 18 IS MULTIPLIED WITH 40000=720000

COST (10) MEANS (4+3+2+1)

THEN 10 IS MULTIPLIED WITH 40000= 400000

OPERATING INCOME = REVENUE -COST

                  =720000-400000=320000