Fruities Ltd has two divisions, Durian Division and Juice Division. Durian Divis
ID: 2406702 • Letter: F
Question
Fruities Ltd has two divisions, Durian Division and Juice Division. Durian Division has an annual capacity of 10 000 units of durian juice concentrate. Juice Division's annual requirement of durian juice concentrate is 8000 units. Fruities Ltd requires that divisions should purchase inputs internally where available, and uses a cost-plus transfer price policy, where transfer price is set at variable cost plus 25 per cent. Therefore, Durian Division always satisfies the demand of the Juice Division first, before selling the remaining durian concentrate to external suppliers at the market price of $10 per unit. The variable cost of one unit of durian juice concentrate at Durian Division is $6. The external demand for Durian Division's durian juice concentrate is 2000 units. What is the difference in the overall profit of Fruities Ltd under the cost-plus transfer price policy and a market-price transfer price policy?Explanation / Answer
Transfer Price:-
Cost plus TP policy
Market Price TP Policy
Variable cost
6
----
+ 25%
1.5
----
Market Price
---
10
Transfer Price
7.5
10
Difference in Overall Profit :-
Profit Lost if Durian Division Transfer 8000 durian juice to Juice Division @ 7.5 = 8000 * 2.5 = 20000
Profit lost = 20000
Cost plus TP policy
Market Price TP Policy
Variable cost
6
----
+ 25%
1.5
----
Market Price
---
10
Transfer Price
7.5
10
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