Still Love Enterprise produces and sells old hits records players and has two divisions, Hit and Miss.

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Question:

Still Love Enterprise produces and sells old hits records players and has two divisions, Hit and Miss. Currently the Miss Division buys a part from the Hit Division for $984. The Hit Division wants to increase the price of the part it sells to the Miss Division to $1,200, which is the price it charges customers outside the group. The cost data for the Hit Division is as follows: Direct materials $306 Direct labour $390 Variable overhead $270 Fixed overhead $115

Required: Explain and calculate the transfer prices at which the Hit Division should offer to transfer the part to the Miss Division in order that the group profit maximizing decisions may be taken on financial grounds in each of the following independent situations:

(a) Hit Division has an external market for its entire product. (2 marks)

(b) Hit Division has excess capacity to supply all parts needed by the Miss Division. (3 marks)

(c) Hit Division has excess capacity for only 3,000 of the total 10,000 parts needed by the Miss Division. However, the Hit Division has an alternative use for this excess capacity which equates to a contribution of $60 for each part. (3 marks)

(d) Explain two objectives of transfer pricing systems. (2 marks)