Topic: Transfer of pricing Uninder Corporation produces automobile parts and it primarily sells parts to external customers. One of its subsidiary companies uses a part which can be produced by Uninder Corporation and it requires 10,000 units annually. Uninder Corporation has no idle capacity. The subsidiary company has a bid from an external supplier for the parts at £31.00 per unit. The variable production costs for these parts would amounts to £12.00 per unit. Packaging and shipping costs for the part would be only £2.00 per unit. To fill the order from the subsidiary company, Uninder should give up the production of another part, TW3. It sells the part for £35.00 per unit, and requires £13.00 per unit in variable production costs. Packaging and shipping costs for TW3 would be only £3.00 per unit. The company is producing and selling 50,000 units of the TW3 each year. The production and sales of the TW3 would drop by 10% if the part is produced for the subsidiary company. Required Calculate the minimum price that would be acceptable for the Uninder Corporation to retain the present profit. Calculate the opportunity cost per unit for the Uninder Company If the lowest acceptable transfer price to the selling division is £90 and the lost contribution margin per unit on outside sales is £40, determine the variable cost per unit.

a & b Minimum price and the opportunity cost Cost of production and selling of automobile parts Variable cost for the production 120000 Shipping cost 20000 Opportunity cost for TW 3 95000 Minimum price to retain the same 235000 level of the profit Per unit 23.5 Note The company is currently producting and selling TW 3 of 50000 units in the market However, there would be a drop of 10% if the company sells excess units of automobile partks So, 5000 units would not be produced Opportunity cost per unit SP 35 Less: Variable cost Production cost 13 Selling cost 3 16 Contribution per unit 19 Total contribution lost over 5000 units 95000 c Variable cost per unit Transfer lowest acceptable 90 Margin cost lost 40 Variable cost per unit 130 .

Topic: Transfer of pricing Uninder Corporation produc…

Answers

a & b	Minimum price and the opportunity cost

	Cost of production and selling of automobile parts

	Variable cost for the production		120000
	Shipping cost		20000
	Opportunity cost for TW 3		95000
	Minimum price to retain the same		235000
	level of the profit
	Per unit		23.5

	Note
	The company is currently producting and selling TW 3 of 50000 units in the market
	However, there would be a drop of 10% if the company sells excess units of automobile partks

	So, 5000 units would not be produced

	Opportunity cost per unit

	SP	35
	Less: Variable cost
	Production cost	13
	Selling cost	3
		16

	Contribution per unit	19

	Total contribution lost over 5000 units		95000

c	Variable cost per unit

	Transfer lowest acceptable		90
	Margin cost lost		40
	Variable cost per unit		130

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