Dr. Sanjay S.

Gaikwad SBPIM

Examples on Transfer Pricing

Ex.1: ABC Company fixes the inter divisional transfer price for its products on the basis of
cost plus return on investment in the division. The budget for the division A for 2022-23 is as
under:

Fixed assets ₹ 250000

Current assets ₹ 150000
Debtors ₹ 100000
Annual fixed cost of division ₹ 400000
Variable cost per unit of product ₹ 10
Budgeted volume 200000 units per year
Desired ROI 28%

1. Determine the transfer price for division A.

2. If the volume (units) can be increased by 10%. What will be the impact on the transfer
price?

Ex.2: A company having two separate divisions and have a unique transfer pricing policy
between them. The following information is available for both the divisions, i.e. Supplying
division and Receiving division.

Particulars Supplying division Receiving division

Variable cost ₹ 18 per unit ₹ 15 per unit
Processing cost ₹ 14 per unit ₹ 12 per unit
Selling price (Open market) ₹ 40 per unit ₹ 75 per unit

Currently transfer price is fixed on the basis of market price. However, Receiving divisions
gets outside supplier who is ready to supply the semi-finished goods at ₹ 36 per unit and
proposes the Supplying division to revise the transfer price accordingly.

1. Should the manager of Supplying division accept the proposal if there is no external
market.
2. What is the impact on profitability of individual departments and overall company due
to the changed scenario?

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Ex.3: An enterprise wanted to give up the transfer price on cost plus 15%. Return on Investment
basis using following information related to its XYZ division for 2021-22 determine the
transfer price for the division.

Fixed assets ₹ 1500000

Current assets ₹ 1000000
Debtors ₹ 500000
Annual fixed cost of division ₹ 1500000
Variable cost per unit of product ₹ 40
Budgeted volume (units) 250000

If the volume is increased by 10%, with similar % decrease of current assets. What will be the
impact on transfer price?

Ex.4: ABC company has practice of fixing inter department transfer price for its product on
the basis as cost plus return on investment in the division. The budget for division A for the
year as follows –

Annual budgeted output 600000 units

Variable cost ₹ 10 per unit
Fixed cost of division A ₹ 20 lakhs
Total investment in the division ₹ 20 lakhs
Expected return on investment 24%

Calculate transfer price for division A.

Ex.5: ABC corporation manufactures and sells three products A, B and C. Following
information is available.

Particulars A B C
Quantity (Units) 15000 30000 40000
Unit Selling Price 20 15 35
Unit Variable Cost 17 9 28

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Total annual fixed cost is ₹ 340000. When these costs are apportioned on the basis of total
quantity, product A shows a loss of ₹ 1 per unit.

You are required to advise the management regarding

a) Should product ‘A’ be discontinued?

b) If product ‘A’ is discontinued, how many more units of product ‘B’ should be sold to
maintain the same amount of aggregate profit?
c) If profit of ₹ 3 per unit is desired on product ‘A’, what should be its selling price?

Ex.6: M/s Suparna fixes the inter divisional transfer price for its products on the basis of cost
plus return on investment in the division. The budget for the division A for 2022-23 is as under:

Land and building ₹ 300000

Plant and machinery ₹ 500000
Stock ₹ 200000
Bills receivables ₹ 100000
Debtors ₹ 200000
Annual fixed cost of division ₹ 800000
Variable cost per unit ₹ 10
Budgeted volume of production per year 500000
(units)
Desired Return on Investment 27%

Determine the transfer price.

Ex.7: A company is organized on decentralized lines with each manufacturing division

operating as a separate profit centre. Each division manager has full authority to decide on the
sale of the division’s output to outsiders and to other divisions.

Division C has always purchased its requirement of a component from division A. but when
informed that Division A was increasing its selling price to ₹ 150, the manager of Division C
decided to look at outside suppliers.

Division C can buy the component from an outside supplier for ₹ 135. But Division A refuses
to lower its price in view of its need to maintain its return on investment.

The top management has the following information.

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Division C’s annual purchases of the component – 1000 units.

Division A’s variable cost per unit - ₹ 120

Division A’s fixed cost per unit - ₹ 20

Required –

a) Will the company as a whole benefit, if Division C bought the component at ₹ 135 from
an outside supplier?
b) If division A did not produce the material for Division C, it could use the facilities for
other activities resulting in a cash operating savings of ₹ 18000. Should Division C then
purchase from outside sources?
c) Suppose there is no alternative use of Division A’s facilities and the market price per
unit for the component drops by ₹ 20, should Division C buy from outside?

Ex. No. 8: Tech Patni heavily decentralized. Division A has always acquired some components
from division B. However, division B has intimated increase in its price to ₹ 150 per piece.
Manager of division A has opposed the same since similar product is available in outside
market at ₹ 120 per piece. Division B has supported its price rise as it is bearing heavy
depreciation charge on specialized equipment they have bought specially for the component.
Additional information is as follows –

Total capacity of Division A – 10000 pieces per year.

B’s variable cost - ₹ 100 per piece.

B’s fixed cost - ₹ 30 per piece.

a) Suppose there is no alternative use of division B’s capacity, Will the company as a
whole benefit, if Division A buys the component from outside at ₹ 120 per piece?
b) Suppose outside market price of the component drops by ₹ 30 per piece, what would
you suggest to the manager of division A?
c) If division B earn rent of ₹ 500000, if it is not manufacturing the component, will the
company as whole benefits if division A buys the component from the outside market?

Ex. No. 9: A company has two divisions A and B. Division A produces a component used by
division B in making the final product. The following information is available.

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Due to purchase of new machinery, depreciation cost has increased for division A and hence
want to transfer the component at ₹ 220, that is available externally at ₹ 200 for division B.

Variable cost of division A is ₹ 190, fixed cost per unit ₹ 20 and production capacity 2000
units. The processing cost of division B is ₹ 150 and selling price of final product is ₹ 400 per
unit.

i) If there is no alternative use of the production facilities of A, will the company as whole
benefit if division B buys from external supplier?
ii) If internal facilities of division A can be alternatively used to generate annual cash operating
savings of ₹ 30000 for division A, should division B purchase the component from outside
supplier?

Ex. No. 10: ABC ltd has a policy of fixing the transfer price on cost plus 20% ROI basis. The
following information of division A is available for the financial year 2021-22.

Fixed assets : ₹ 1250000

Current assets : ₹ 750000

Debtors : ₹ 500000

Annual fixed cost of the division A : ₹ 2000000

Variable cost per unit : ₹ 50

Budgeted volume (units) : 200000

a) Determine the transfer price for division A.

b) If the volume (in units) is increased by 10%, current assets increases by ₹ 250000 and
debtors increases by ₹ 250000. What will be the impact on transfer price?

Ex. 11: A company has two decentralized divisions A and B. Division A has always purchased
certain units from division B at ₹ 7500 per unit. Division B plans to raise the price to ₹ 10000
per unit, hence division A desired to purchase these units from outside suppliers for ₹ 7500 per
unit. Division B’s costs are as follows:

Variable cost per unit ₹ 7000

Annual fixed cost ₹ 1500000
Annual purchase 100000 units

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You are required to calculate, if division A buys from the outside supplier, the facilities of
division B uses to manufacture these units would remain idle. Would it be more profitable for
the company to enforce the transfer price of ₹ 10000 per unit than to allow A to buy from
outside suppliers at ₹ 7500 per unit?

Ex. 12: A transportation equipment manufacturer is heavily decentralized. Each division head
has full authority on all decisions regarding sale to internal or external customers. Division A
has always required a certain component from division B. However, when informed that
division B was increasing its unit price to ₹ 220, division A’s management decided to purchase the
component from outside supplier at a price of ₹ 200. Total annual capacity of division B is 2000 units
per year.

Division B had recently acquired some specialised equipment that was used primarily to make
this component. The manager cited that resulting high depreciation charges as the justification
for the price boost. He asked the president of the company to instruct division A to buy from
division B at ₹ 220. He supplied the following information.

A’s annual purchase of components : 2000 units

B’s variable cost per unit : ₹ 190

B’s fixed cost per unit : ₹ 20

A] Suppose there are no alternative uses of B’s facilities –

1. Will the company as whole benefit if A buys from outside suppliers for ₹ 200 per unit?
2. Suppose the selling price of outsiders drops by another ₹ 15 to ₹ 185, should A purchase
from outsiders?
3. Suppose that division B could modify the component at an additional variable cost of
₹ 10 per unit and sell the 2000 units to the other customers for ₹ 225 per unit. Would
the entire company then benefit if division A purchases the 2000 components from
outsides at ₹ 200 per unit?

B] If internal facilities are leased out for ₹ 29000 per year, should division A purchase from
outsiders at ₹ 200 per unit?

Ex. 13: Faster limited is having a welding shop and painting shop. The welding shop welds
annually 75000 purchased items and other 150000 shop made parts into 12000 assemblies. The
assemblies have variable cost of ₹ 9.50 each and are sold in the market at ₹ 12 per assembly.

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Out of the total production, 80% is divested to the paint shop at the same price ruling in the
market. Welding shop incurs a fixed cost of ₹ 25000 per annum. The painting shop is having
fixed cost of ₹ 30000 and its cost of painting including transfer price from welding shop comes
to ₹ 20 per unit. This shop sells all the units transferred to it by welding shop at ₹ 25 per
assembly.

You are required to compute –

1. Find out the profits of individual cost centres and overall profitability of the concern.
2. Recommended course of action if paint shop wishes to purchase its full requirement either from
open market or from welding shop at market price of ₹ 10 per assembly. Give reasons for your
recommendation.

Ex. 14: A business unit produces and sells three products P, Q and R. The annual data for the
products is as follows.

Particulars P Q R
Quantity in units 10000 25000 35000
Unit Selling Price in ₹ 18 10 30
Unit Variable Cost in ₹ 16 6 22

Total annual fixed cost is ₹ 210000. When these costs are apportioned on the basis of total
quantity, product ‘P’ shows a loss of ₹ 1 per unit.

You are required to advise the management regarding

a) Should product ‘P’ be discontinued?

b) If product ‘P’ is discontinued, how many more units of product ‘Q’ should be sold to
maintain the same amount of aggregate profit?
c) If profit of ₹ 2.50 per unit is desired on product ‘P’, what should be its selling price?

Ex. 15: A company has two divisions A and B. Division A sells one third of its output in the
open market and transfers the rest to division B. Costs and revenue during the year is as follows.

Particulars Division A Division B Total

Sales (₹) 16000 48000 64000
Cost of production in 24000 20000 44000
the division (₹)

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Profit during the period 20000

(₹)

There is no opening or closing stocks. You are required to find out profit of each division and
the profit of the company using transfer price:

a) At cost
b) At cost plus margin of 25%
c) At cost plus 25% but there is overspending in the division A by ₹ 3000
d) At standard cost of ₹ 16000 plus 25%
e) At market price

Ex. 16: Aditya Enterprises has two divisions, Press Shop and Assembly Shop. Press shop
manufactures 200000 pieces and transfers it to Assembly shop. Assembly shop can purchase
all the components from outside market for which it has received quotations at ₹ 8 per piece if
200000 pieces are bought and at ₹ 6 per piece if 400000 pieces are bought.

Cost of manufacturing the same for Press shop would be at ₹ 6 per piece if 200000 pieces are
manufactured and at ₹ 4 per piece if 400000 pieces are manufactured.

Cost of manufacturing for Assembly shop would be at ₹ 10 per piece if 200000 pieces are
manufactured and at ₹ 8 per piece if 400000 pieces are manufactured and sales price expected
is ₹ 25 per piece for 200000 pieces and ₹ 20 per piece for 400000 pieces.

Calculate department wise profitability and total profits for 200000 and 400000 pieces if

1. Transfer price be equal to market price.

2. If profit is shared in proportion to cost.

Ex. 17: Ganesh industries has two shops welding and paint shop. Weld shop assembles 50000
purchased items and 150000 internal items into 40000 assemblies and forwards 75% to paint
shop. Variable cost of one assembly is ₹ 200 per piece and market price is ₹ 300 per piece. The
transfer price decided is equal to market price. Fixed cost of weld shop is ₹ 10 lakhs and of
paint shop is ₹ 12 lakhs and variable cost (including transfer price) is ₹ 500 piece. The sales
price for paint shop is ₹ 750 per piece.

Calculate:

1. Profit of individual cost center and overall profitability.

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2. What should be done if paint shop wishes to purchase assemblies at ₹ 200 from outside
due to reduced market price?

Ex. 18: A company has two divisions, division X and division Y. the details are as follows –

Division X can manufacture 100000 number of switches per year with a variable cost of ₹ 10
per switch and selling price is ₹ 15 per piece. Each switch requires one labour hour to make.
Division Y has developed a motor for which revised model of switch is required. There are two
options available –

1) To buy modified switch from an external supplier at ₹ 11 per piece for annual
requirement of 100000 units.
2) Division X can give up its existing production and can produce modified switch. The
variable cost of which would be ₹ 7 per piece. Division Y will further spend ₹ 25 on it
and would sell the motor in outside market at ₹ 50 per piece. As a management
consultant advice the company what is in the best interest of overall company.

Ex. 19: Singhania Ltd has two divisions “A’ and ‘B’. Division A operating at full capacity,
selling its output in outside market for ₹ 50 per piece. Its variable cost is ₹ 30 per piece. Division
B requires the same product as its input and is ready to pay ₹ 40 per piece for it. Division B is
operating at 50% capacity. Its cost structure is as follows –

Particulars ₹ Per piece

Material from division A 40
Other material 100
Processing cost 70
Fixed costs 40
Total cost 250

Division B is charging sale price at cost plus 20% as profit. Company uses ROI as performance
measurement tool.

Comment –

1) As a manager of division A would you accept ₹ 40 per piece as transfer price?

2) Would it be in the overall interest of company if division A accepts the quoted transfer
price?

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3) Suggest a transfer price which would be motivating for division A.

Ex. 20: There are two divisions X1 and X2 of Rishabh Enterprises. Division X1 is selling
80000 units in outside market and is selling internally remaining 20000 units to division X2 at
₹ 25 per unit. Its variable costs are ₹ 15 per unit and fixed costs are ₹ 400000. X2 is ready to
pay ₹ 20 per unit as transfer price. If 1 does not transfer the product to division X2, it can save
₹ 100000 on its fixed costs and ₹ 200000 on its fixed assets out of ₹ 1500000 of its total assets.

a) As a management consultant suggest whether X1’s manager should accept to transfer

the product at ₹ 20 per unit to X2?
b) What should be the minimum transfer price X1 should accept?

Ex. 21: Division X of a large divisionalised manufacturing firm produces part A that is used
as input by division Y to manufacture the finished product. The cost structure of division X is
as follows –

Particulars ₹ Per unit

Direct material 25
Direct labour 6
Variable overheads (manufacturing) 4
Fixed overheads (manufacturing) 8
Total cost 43

At volume of 200000 units, X incurs fixed selling and administration costs of ₹ 1000000 and
variable selling cost are ₹ 2 per unit.

Currently division X is selling the part to external customer at 65 per unit. Division X has
capacity to produce 200000 units per year. However, due to recession, expects to sell 150000
units in coming year. Variable selling expenses are not applicable in case units are transferred
to division Y. Division Y is buying the same part from outside supplier at ₹ 60 per unit. Division
Y expects to purchase 50000 units in coming year. The manager of division Y offers to buy
50000 units from division X at ₹ 40 per unit.

1) Determine the minimum transfer price that division X would accept.

2) Determine the maximum transfer price that division Y would pay.
3) Should manager of division X accept the proposal of division Y?

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4) If the average investment of division X is ₹ 1 crore, compute ROI for coming year
assuming that 50000 units are transferred to division Y for ₹ 48 each.

Ex. 22: ABC Ltd is a multi-division integrated company. One of its division A produces a
product, which is being sold in open market entirely. However, in view of demand from
division B, division A supplies part of its produce to division B. to keep motivated both the
divisions, company has established a transfer pricing policy such as division B shall pay actual
full cost plus 50% of profit of division A would have made in open market. Details of division
A are as follows –

Volume per year 10000 units.

External sales at ₹ 150 per unit – 6000 units.

Internal transfer of 4000 units.

Variable cost ₹ 80 per unit.

Fixed cost ₹ 20 per unit

Required –

1) Transfer price according to existing policy.

2) Increase in demand from division B goes up from 4000 to 6000 and division B agrees
to pay 60% of profit. What would be the transfer price?
3) Compute profitability of division A as per Q1 and Q2.
4) Giving selling price of final product by B is 250 per unit, variable cost (excluding
transfer price) ₹ 30 per unit, fixed cost ₹ 20 per unit (based on volume of 4000 units),
compute the profitability of division B as per Q1 and Q2.

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