18. Fragrance Pty Ltd has two divisions: the Cologne Division and the Bottle Div

Question

18. Fragrance Pty Ltd has two divisions: the Cologne Division and the Bottle Division. The company is decentralised and each division is evaluated as a profit centre. The Bottle Division produces bottles that can be used by the Cologne Division. The Bottle Division's variable manufacturing cost per unit is $2.00 and shipping costs are $0.10 per unit. The Bottle Division's external sales price is $3.00 per unit. No shipping costs are incurred on sales to the Cologne Division. The Cologne Division can purchase similar bottles in the external market for $2.50. Assume the Bottle Division has no excess capacity and can sell everything produced externally. Using the general rule, the transfer price from the Bottle Division to the Cologne Division would be: A. $2.10 B. $2.50 ?. $2.90 D. $3.00

Explanation / Answer

Solution Transfer Pricing As per Rule, If Every division is considered as the profit centre, then transfer pricing to be charged from other division should be the price charged from the External clients. But if any extra cost is spend for external sales , that will be excluded from the external sales price as it will not be spended to transfer to the other division Therefore price to be charged as under: Particulars Amount External Price 3 Less: shipping cost not to be spended in tranfer 0.1 Transfer Price 2.9

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