ACC202 Management Accounting: Transfer Pricing Analysis

This assignment explores the concept of transfer pricing within a management accounting context, specifically focusing on how different transfer pricing methods affect divisional performance and profitability. The scenario involves two divisions, Cushion and Furniture, within a company, and examines the impact of transferring goods between them at variable cost versus market price. The solution includes a revised profit statement demonstrating the improved performance of the Cushion Division when transferring products at market price. The analysis incorporates calculations of contribution margin, variable costs, and total sales revenue to support the conclusions. The assignment also highlights the importance of considering the percentage of contribution and the impact of variable selling expenses on overall profitability. The provided solution showcases a practical application of transfer pricing principles in decision-making and performance evaluation within a business setting.

ASSESSMENT 3 TASK (2)
Transfer pricing is referred as the value attached to the transferring of products and services
among the involved parties. Therefore, transfer pricing is stated as the price payable for goods
that are transferred from an economic unit to other, making assumption that the two related
united are based in different countries, however belongs to the similar international
firm (Rugman and Eden, 2017). In terms of taxation, transfer pricing means the rules and
process for pricing transactions in and between business entities as per the common ownership or
supervision.
In the given study, it is stated that out of the total sales of $4000000, Cushion Division Sales
made to the Furniture Division of $500000, and the transfer price of these sales were at variable
cost. However, the divisional manager of the Cushion was not satisfied with the operating
performance. Therefore, for improving the operating performance, he required to sell the cushion
at cost and earn a certain profit margin profit. With this aspect, he wants to transfer the product
to the Furniture Division at cost plus mark up. The mark up is based on the existing contribution,
which is earned by the Cushion Division from sales to outsider market. The revised profit and
loss statement is based on the cushion division made the profit, if it sales at market price.
Table 1 Revised Profit Statement
Particulars
Carpet Division
(in $)
Furniture
Division(in $)
Cushion
Division(in $)
Sales 3000000 3000000 4120000
Less- variable cost
Direct Material 500000 1000000 1030000
Direct Labor 500000 200000 1030000
Variable overhead 750000 50000 1030000

Administrative Expenses 85000 140000 41200
Selling Expenses (80%
variable) 480000 480000 412000
Contribution (Sales – Variable
Cost) 685000 1130000 576800
Fixed manufacturing Cost 250000 50000
Administration expenses 215000 360000 360000
Selling expenses (20% fixed) 120000 120000 100000
Profit 100000 600000 116800
On the basis of the above calculations, it has been drawn that, revised profit statement shows the
improved performance of cushion division. Actually, if the cushion division transfers the product
to the furniture division at market price, then the operating performance will improve. The
revised profit statement depicts the actual profit earning capacity of the cushion division.
Working Notes
1. Calculation of Total Sales Revenue of Cushion Division, if the Transfer price is the market
price
Computation of existing percentage of contribution of Cushion Division
Table 2 Calculation of percentage of contribution and revised sales of Cushion Division
Particulars Amount in $
Sales to external market 3500000
Variable Cost 2660000
Contribution 840000
% of contribution 24
Sales Revenue generated from Furniture Division at Market Price 620000
Sales from the external market 3500000
Total Sales 4120000

 Variable Cost = 3040000/4000000*3500000
= 2660000
2. Out of the total selling expenses, 80% are variable. In case of the Cushion Division, out of the
total selling expenses of 500000, 20% is fixed, that is 100000 is fixed selling expenses, and
400000 is variable selling expenses on the total sales of 4000000. Therefore for the total revenue
of 4120000, the variable selling expenses will be 400000/4000000*4120000 = 412000.
3. All the variable expenses of Cushion Division is based on the total sales of $ 4120000.

REFERENCES
Rugman, A. and Eden, L., 2017. Multinationals and transfer pricing. Routledge, New York.