Transfer pricing (2023)
HighTech Inc. 's Screen Division manufactures AMOLED display screens used in
mobile devices and televisions. Part of the Screen Division's outputs is sold to outside
markets and part is used in the production of smartphones in the company's Phone
Division. These smartphones are produced and sold under the name of HighTech.
The following is budgeted information about the costs and sales of the company for
the next fiscal year of 2023.
Screen Division Phone Division
Selling price (per unit) $500 $1,000
Variable production cost $210 $300
(per unit)
Fixed production overhead $45,000,000 $60,000,000
(total)*
Variable selling overhead $60 $130
cost (per unit)**
Fixed selling and admin $35,000,000 $50,000,000
overhead cost (total)
Market sales (units) 150,000 800,000
Internal sales (units) 800,000
Production capacity 1,000,000 900,000
(units)
* Fixed production overhead costs are absorbed by products on the basis of full
capacity.
** Variable selling overhead costs are incurred on market sales only.
The current transfer pricing policy at HighTech is using full production cost plus a
30% markup. However, some managers within the company argue that a marginal
cost approach would be more logical.
Required:
a) Calculate the transfer price of the screens which will be sold by the Screen
Division to the Phone Division in 2023. (5 marks)
b) Compute the budgeted profit for both divisions and the company as a whole.
(10 marks)
c) The managers of the Phone Division believe that their division would be better
off if they increase the selling price of phones by 12% and reduce the sales
volume by 30%. Recalculate the two divisions' and overall company profits if
this proposal is implemented and give comments on the results (15 marks)
d) What range of prices should the transfer price be selected (10 marks).
Variance analysis (2022)
U-Pack Company provides house moving services in the city. Company has 30
employees providing a budgeted amount of 500 jobs per month.
There are 2 types of direct labour working in the company; packaging labor at the
wage rate of £25 per hour, and moving labour with a wage rate of £15 per hour.
One moving job typically requires a combination of 4 packaging hours and 2 moving
hours.
In April 2022, the actual moving jobs done was 450 with following data:
● Packaging labor: 3,000 hours at a total cost of £74,400
● Moving labor: 1450 hours at a total cost of £21,605
Required:
a) Calculate the direct labor price and usage (efficiency) variances for April 2022
for packaging labor. (4 marks)
b) Calculate the direct labor price and usage (efficiency) variances for April 2022
for moving labor. (4 marks)
c) Calculate the total labor usage (efficiency) variance for April 2022 (1 mark)
d) Calculate the total direct labor mix and yield variances for April 2022 (15
marks)
e) Interprete the variances you have calculated in (d). (6 marks)
f) Evaluate the usefulness of planning and operational variances for control
purposes when price changes occur that are beyond the control of the
business (10 marks)
Risk and uncertainty (based on 2023 exam)
Part 1 (2023)
Managers of Wise Investment Fund are considering three mutually exclusive
investment projects in Europe. The success of investments depends largely on the
development of the war in Ukraine that has been affecting the European economy. If
the diplomatic solutions to end the war fail, the economy of continental Europe may
fall into a deep recession.
The lead economist of the Fund has forecasted 3 possible for the economy in the
Incoming period as follows.
Economic prospect Probability
Good 30%
Stable 20%
Worse 50%
The profits of each project under these scenarios are predicted as follows.
Economic prospect Project X Project Y Project Z
Good $15,000,000 $16,500,000 $16,000,000
Stable 10,000,000 10,500,000 11,000,000
Worse 4,100,000 3,800,000 4,000,000
a) Which project should be selected based on expected value criteria (9 marks)
b) An advisor is offering reliable forecasts of economic conditions. What is the
maximum amount the company could pay for the information?. (6 marks)
c) Critically evaluate the usefulness of expected values in decision making (10
marks)
Part 2
The fund is also considering investments in a normal chip plant or an Al chip plant in
Asia. This is a new investment area for the company in which they do not have much
experience
The normal chip plant would cost 66,000,000 USD and the Al chip plant would
require an investment of 121,000,000 USD.
No matter what investment decision is selected the managers of the fund predict the
net profit would be 130,000,000 USD if the market for computing devices is
promising, if the market is unfavorable the predicted net profit is 132,000,000 USD
only.
If the company invests in an AI chip plant, the probability of a promising market is
75%, if the investment is made in a normal chip plant the probability of promising
market would reduce down to 60%.
The fund could also choose to take a survey to evaluate the prospects of investment
decisions. From previous surveys the likelihood of a good response is predicted at
80%.
If the survey results are good, the fund will invest in an AI chip plant. With good
response, the probability that the market will be promising for Al chip plant would
increase to 95% If the survey shows bad response the fund will give up all investment
decisions.
Required:
a) Draw a decision tree showing figures for cost, profit (loss) on the branches.
(10 marks)
b) Calculate the expected value of the 3 decisions, based on that information
which course of action that the fund would proceed? (5 marks).
Learning curve (based on 2023 exam).
Robotics company manufactures robots designed for healthcare applications. In
February 2023 the company won a bid to produce 8 robots of its newest model. The
estimated production costs are as follows:
Direct material cost per robot $200,000
Direct labor time per robot 2,500 hours
Direct labor rate $30 per hour
Facility-related manufacturing overhead $20 per direct labor hour
cost*
Supporting overhead cost** 10% of direct material cost
*Facility-related manufacturing overhead cost is allocated based on direct labor hour.
**Supporting overhead cost is allocated based on direct material cost.
Robotics has an 80% learning curve. And the company pricing policy is based on full
production cost plus a markup of 35%.
Required:
a) Calculate the following:
i) The selling price of the first robot manufactured. (5 marks)
ii) The prices of both the first and second robots manufactured if bought together.(7
marks)
iii) The prices of the third and fourth robots manufactured if the first two have already
been sold when the order is placed. (9 marks)
iv) If all 8 robots are sold to one customer what price would be charged (9 marks)
per robot.
b) Assume that the first 7 robots have already been purchased by a customer.
Another customer orders the 8th robot. What would be the selling price of that
8th robot? (you should use the mathematical method to support your
calculations, a 80% learning curve means the learning coefficient, b = -
0.321928) (10 marks)
Total: 40 marks
