CASE STUDIES

Subject- Management Control Systems

Topic- Fixing of interdepartmental Transfer price

COMPILED BY: Professor Sameer Kulkarni

CS-1

M/s. Sam Engineering is comprised with two separate manufacturing divisions, ‘A’ and
‘B’. Both are operating as a separate profit centre. Each division manager has full
authority to decide on sale of division’s out put to outsiders and to other divisions.

Division ‘B’ is purchasing its annual requirement of 1000 units of a component

manufactured by division, ‘A’. Division manager ‘A’ took a decision of increasing the
selling price of the component to Rs.150/unit.

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This increase in price has motivated divisional manager’ ‘B’ to explore the possibilities
/opportunities for out sourcing the same component from third party suppliers.

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Division ’B’ get the proposal from such an out side supplier @ Rs.135/unit. Divisional
manager ‘A’ refused to decline the proposed hike in selling price; following justification
was furnished in support of the price hike:
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• Division ’A’ variable Cost in manufacturing each component is Rs: 120/-
• Division ’A’ fixed Cost in manufacturing each component is Rs: 20/-
• In case if division ‘B’ stops the proposed purchase from division ’A’ the same
facilities can be exploited for some other activities resulting in a cash flow of
Rs.18,000/-
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The top management wants to assess the situation under given conditions, and would
To

like to find out the cost justification of both the division managers’
Find out the positional benefits under various situations available for both the divisions.

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 CS-2

Two divisions, Component and Assembly of Videocon Television Co are working under
separate heads. The Component divisional produces three types of products ‘A’, ‘B’,
‘C’, normally these products are sold to both the out side customers and to the
assembly division of the company. The assembly division uses products ‘A’, ‘B’, ‘C’ in
assembly of products ‘P’, ‘Q’,’ R’, respectively.

In recent weeks the supply of products A, B and C has tightened to such an extent the
divisional operation of the assembly unit is going down significantly. With the results the
component division has been told to sell all its products to assembly division. Following
are the financial details about these products:

Particulars Product A Product B Product C

Transfer Price Rs.10 Rs.10 Rs.15
Variable Mfg Cost 3 6 5
Contribution/unit 7 4 10

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Fixed Cost (total) Rs.50,000 Rs.1,00,000 Rs.75,000

The component division has a monthly capacity of 50,000 units. The processing
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constraints are such that capacity production can be obtained only by producing at least
10,000 units of each product. The remaining capacity can be used to produce 20,000
units of any combination of the three products. The component division can not exceed
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the capacity more than 50,000 units.

Other financial data is as follows:

Particulars Product P Product Q Product R

p

Selling Price Rs.28 Rs.30 Rs.30

Variable Cost:
To

Inside Purchase 10 10 15
Other Variable 5 5 8
Costs
Contribution per unit 13 15 7
Fixed Cost (Total) Rs.1,00,000 Rs.1,00,000 Rs.2,00,000

The assembly division has sufficient capacity to produce about 40% more than its
present production. The market condition is so that all the produced of assembly
division can be sold in the market.

• If, you were the divisional manager of the component division, what way you had
planned the products to maximize the amount of profit?
• If, you were the divisional manager of the final assembly division, which product
you might have purchased from your component division?
• What production pattern optimizes total profit of the company?

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