UK Transfer pricing

Jan 14, 2020
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United Kingdom
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.
Thank you in advance :)

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.


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