Transfer Pricing Mock Exam Questions – Solutions

As promised, let me walk you through the solutions to the transfer pricing mock exam questions you tried earlier…

Solution to question 1:

Answer £8

To maximise group profit we need to set the transfer price at the lowest price available.

In most cases, and in this scenario, the lowest transfer price is marginal cost which is given as £8 per unit in the question.


Solution to question 2:

i) Quantity to be sold to maximise group profits

Answer 30 units

Now, we already know the optimum transfer price is £8 from question 1 and so that is our marginal cost for each processor.

To find the optimum number of units for the finished product we use the formula:

MR = a – 2bx

a = 70

b = 0.7 (demand increases by 1 unit for every £0.70 reduced from the price)

MR = 70 – (2 * 0.7) x

MR = 70 – 1.4x

Profit is maximised at MR = MC.

We know the MC of a processor is £8 (the transfer price charged by the Processor Division) and that MC per unit without a processor is £20 (given in the question). Therefore, total MC per laptop is £28.

70 – 1.4x = 28

42 = 1.4x

30 = x

Therefore, at 30 units, group profit is maximised

ii) Sales price to maximise group profit

Answer £49

To find the optimum selling price to be charged we use the formula:

P = a – bx

P = 70 – (0.7 * 30)

P = 70 – 21

P = 49

Therefore, at a selling price of £49 per laptop, profit is maximised

NB Group revenue would be 30 laptops sold at £49 each = £1,470

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One thought on “Transfer Pricing Mock Exam Questions – Solutions

  1. Increase in demand for drop in every $1 is 0.7
    Should demand increases by 1 unit for every 1/0.70 reduced from the price instead?

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