# UKTransfer pricing

#### Jack4132

Hi!
I am preparing to my exam from transfer pricing and I found some examples online I can use to practice, the problem is they have no answers so I cannot check if I got it right. I would be grateful if someone could check my answers to these questions and confirm if I got them right and if not could you please explain me why and provide with the correct answers.

QUESTIONS
Altman manufactures and sells tables. It has several divisions which supply materials to each other. Division M has offered to supply the Division P with table legs at the transfer price of £0.13 per leg. Division M calculates the transfer price based on full cost plus a 30% mark upon cost. Division M can also sell the legs to external customers for £0.14 per leg.

The full cost has been estimated as £0.10 per leg, 80% of this cost is variable, and the other 20% is fixed. If Division M transferred the materials internally to Division P they would make savings of £0.01 per leg of variable packing cost.

Division P uses the legs to produce the tables, which it can then sell to external customers.

Evaluate the transfer prices at which Division M should charge division P if the group’s objective is to maximise profit across the whole group for the following three scenarios:

1. Division M has an external market for all of the legs it produces at £0.14 per leg

2. Division M has the capacity to produce 25 million legs and has an external market for 13 million legs.

3. Division P has found an external supplier that will supply as many legs as they require for £0.11 per leg. Division M is still charging Division P £0.13 per leg. Discuss whether Division P should buy externally and show the range of transfer prices that Division M could sell to Division P at.

1. If the division M has an external market for ALL of the legs it shoud charge the diviion P no less than £0.14 per leg.

2. As the division M has external market for 13 million legs it should sell it at £0.14 per leg for the external market. The rest 12 million leg division M shoud sell to division P and charge at least £0.07 per leg.

3. Division P shoud buy from a extenal supplier for £0.11 per leg.
Division M shoud charge anything between £0.07 - £0.11 per leg.