Nepearth (Pvt) Ltd has earned a reputation for the quality tea it produces. The company has...

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Nepearth (Pvt) Ltd has earned a reputation for the quality tea it produces. The company has two divisions: the bulk division and packet division. At present all the output of the bulk division is transferred to the packet division. Packet division makes 100g packets from each kilo of bulk tea transferred by the bulk division by mixing in different flavors. The cost details of the two divisions are given below. Bulk Division Rs. Variable cost per kg of bulk 650 tea Fixed cost per kg of bulk tea 10 Selling price kg of bulk tea in 750 the outside market Packet Division Variable cost per 100g flavored packet (excluding transfer price) Fixed cost per 100g flavored packet 8 Selling price per 100g flavored packet 125 Bulk Division has produced 9,000 kgs in June 2020. Rs. d) 25 Required: a) Compute the profit of Nepearth (Pvt) Ltd for the month of June 2020. (02 marks) b) Recommend the minimum transfer price that should be charged by the bulk division if it operates under a full capacity. (01 marks) c) Company pays a bonus for its divisional staff based on divisional profit calculated as 5% from the monthly profit. If the company has the following policies for transfer price calculate the bonus received by each division. i. Full Cost plus 20% ii. Marketprice (04 marks) Discuss how transfer pricing may lead to suboptimal decisions in an organization specially when negotiating a transfer price by two investment centres. (03marks) (Total 10marks) Nepearth (Pvt) Ltd has earned a reputation for the quality tea it produces. The company has two divisions: the bulk division and packet division. At present all the output of the bulk division is transferred to the packet division. Packet division makes 100g packets from each kilo of bulk tea transferred by the bulk division by mixing in different flavors. The cost details of the two divisions are given below. Bulk Division Rs. Variable cost per kg of bulk 650 tea Fixed cost per kg of bulk tea 10 Selling price kg of bulk tea in 750 the outside market Packet Division Variable cost per 100g flavored packet (excluding transfer price) Fixed cost per 100g flavored packet 8 Selling price per 100g flavored packet 125 Bulk Division has produced 9,000 kgs in June 2020. Rs. d) 25 Required: a) Compute the profit of Nepearth (Pvt) Ltd for the month of June 2020. (02 marks) b) Recommend the minimum transfer price that should be charged by the bulk division if it operates under a full capacity. (01 marks) c) Company pays a bonus for its divisional staff based on divisional profit calculated as 5% from the monthly profit. If the company has the following policies for transfer price calculate the bonus received by each division. i. Full Cost plus 20% ii. Marketprice (04 marks) Discuss how transfer pricing may lead to suboptimal decisions in an organization specially when negotiating a transfer price by two investment centres. (03marks) (Total 10marks)

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