Transfer Pricing Examples - Colin Chap 21

Required no. a) L limited: i) Monthly profit - at Present Level: Sales (10,000 drums at Rs. 20 per drum) Less: Cost of Sales: a) Direct material (10,000 drums x Rs. 9) b) Other Cost (10,000 drums x Rs. 3) Total variable cost

200,000 90,000 30,000 (120,000)

Contribution Margin

80,000 (40,000) 40,000

Less: Fixed cost Net Profit

Calculation of Sales - Drum by L ltd.: M Ltd. Sales 750,000 ltrs during the month. L ltd purchase 1/3 of M ltd. Sales Therefore L ltd. Purchase =

750,000 x 1/3 250,000 ltrs

Packing of material in 25 ltrs drum, therefore, L ltd purchase Drum =

250,000 ltrs / 25 ltrs per drum

Drum =

10,000 drums.

There is no ending Finished goods and WIP therefore the purchase drum 10,000 drum is sold by L ltd. During the month.

M limited: i) Monthly profit - at Present Level: Sales (750,000 ltrs x 0.36) Less: Cost of Sales: a) Variable cost (750,000 ltrs x 0.2) Contribution Margin Less: Fixed cost Net Profit

270,000 (150,000) 120,000 (60,000) 60,000

Calculation of Sales price per unit:

Calculation of Variable cost per unit:

Sales Price = Sales Price =

Variable cost = Variable cost =

Rs. 9 per 25 ltrs 0.36

L limited: i) Monthly profit - at REVISED Level: Sales (18,000 drums at Rs. 16 per drum) Less: Cost of Sales: a) Direct material (18,000 drums x Rs. 9) b) Other Cost (18,000 drums x Rs. 3)

Rs. 200 per 1,000 ltrs 0.20

288,000 162,000 54,000

Total variable cost

(216,000)

Contribution Margin

72,000 (40,000) 32,000

Less: Fixed cost Net Profit Calculation of Sales - Drum by L ltd.: Drum = 10,000 drums. Plus: Extra Drum = 8,000 drums TOTAL DRUM PURCHASE = 18,000 drum. M limited: i) Monthly profit - at Present Level: Sales (950,000 ltrs x 0.36) Less: Cost of Sales: a) Variable cost (950,000 ltrs x 0.2) Contribution Margin Less: Fixed cost Net Profit COMPARATIVE ANALYSIS: L limited M Limited

342,000 (190,000) 152,000 (60,000) 92,000 Group

Profit - at present level

40,000

60,000

100,000

Profit - at revised level

32,000

92,000

124,000

10,000 drum