CIMA P3: Transfer Pricing Revision – Solutions

Solution to question 1:

Answer $40

The transfer price will be $40 as we assume marginal cost is equal to variable cost and that there is excess capacity unless stated otherwise.


 Solution to question 2:

i) Minimum Transfer Price

Answer $9

The minimum transfer price will usually be marginal cost unless there is an opportunity cost to the division providing the goods/services.

If we read the question carefully there is an opportunity cost for S because they can avoid paying a third of their overhead costs if they stop selling to B.

Calculation:

S Division Costs 
Materials$3.25
Labour$4.75
Variable overhead$0.60
Total Marginal Cost$8.60
Opportunity Cost (1/3 of fixed overheads)
$1.20/3
$0.40
Minimum Transfer Price$9.00

ii) Maximum Transfer Price

Answer $14

The maximum transfer price B will be willing to pay is $14 as otherwise they could buy the goods externally at a cheaper rate.


 Solution to question 3:

i) Number of units to be sold to maximise profit

Answer 300 units

To find the optimum number of units we use the formula:

MR = a – 2bx

a = 75

b = 0.08 -> ($4/50 units) Demand increases by 1 unit for every £0.08 reduced from the price.

MR = 75 – (2 * 0.08) x

MR = 75 – 0.16x

Profit is maximised at MR = MC. MC is given as $27 in the question so:

75 – 0.16x = 27

48 = 0.16x

300 = x

Therefore, at 300 units, profit is maximised

ii) Price to be charged to maximise profit

Answer $51

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

P = a – bx

P = 75 – (0.08 * 300)

P = 75 – 24

P =51

Therefore, at a price of $51, profit is maximised

iii) Revenue generated

Answer $15,300

Revenue is calculated as 300 units sold at $51 each = $15,300

Share Button