School of International Business
Spring 2025
Advanced Management Accounting
Tutorial 8
Chapter 11
1
School of International Business
Spring 2025
Advanced Management Accounting
Tutorial 8
Solution
2. a. The lowest acceptable transfer price from the perspective of the
selling division is given by the following formula:
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School of International Business
Spring 2025
Advanced Management Accounting
Tutorial 8
Total contribution margin
on lost sales
Transfer price ³ Variable cost +
per unit Number of units transferred
Because there is only enough idle capacity to fill 2,500 units from the
Hi-Fi Division’s order, 2,500 units of outside sales will be lost.
Therefore, the lowest acceptable transfer price of $51 is computed as
follows:
($60 - $42) × 2,500
Transfer price ³ $42 +
5,000
³ $42 + $9 = $51
b. The Hi-Fi division can buy a similar speaker from an outside supplier
for $57. Therefore, the Hi-Fi Division would be unwilling to pay more
than $57 per speaker.
Transfer price £ Cost of buying from outside supplier = $57
c. Combining the requirements of both the selling division and the
buying division, the acceptable range of transfer prices in this
situation is:
$51£ Transfer price £ $57
Assuming that the managers understand their own businesses and
that they are cooperative, they should be able to agree on a transfer
price within this range and the transfer should take place.
d. From the standpoint of the entire company, the transfer should take
place. The cost of the speakers transferred is only $51 and the
company saves the $57 cost of the speakers purchased from the
outside supplier.
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School of International Business
Spring 2025
Advanced Management Accounting
Tutorial 8
3. a. Each of the 5,000 units transferred to the Hi-Fi Division must displace
a sale to an outsider at a price of $60. Therefore, the selling division
would demand a transfer price of at least $60. This can also be
computed using the formula for the lowest acceptable transfer price
as follows:
($60 - $42) × 5,000
Transfer price ³ $42 +
5,000
³ $42 + ($60 - $42) = $60
b. As before, the Hi-Fi Division would be unwilling to pay more than $57
per speaker.
c. The requirements of the selling and buying divisions in this instance
are incompatible. The selling division must have a price of at least
$60 whereas the buying division will not pay more than $57. An
agreement to transfer the speakers is extremely unlikely.
d. From the standpoint of the entire company, the transfer should
not take place. By transferring a speaker internally, the company gives up
revenue of $60 and saves $57, for a loss of $3.
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School of International Business
Spring 2025
Advanced Management Accounting
Tutorial 8
Solution
Exercise 11-7 (20 minutes)
1. Total
Division A Division B Company
Sales ...................................
$2,500,0001 $1,200,0002 $3,200,0003
Expenses:
Added by the division.........
1,800,000 400,000 2,200,000
Transfer price paid .............
500,000
Total expenses .....................
1,800,000 900,000 2,200,000
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School of International Business
Spring 2025
Advanced Management Accounting
Tutorial 8
Net operating income ...........
$ 700,000 $ 300,000 $1,000,000
1
20,000 units × $125 per unit = $2,500,000
2
4,000 units × $300 per unit = $1,200,000
3
Division A outside sales
(16,000 units × $125 per unit) ...................................
$2,000,000
Division B outside sales
(4,000 units × $300 per unit) .....................................
1,200,000
Total outside sales .....................................................
$3,200,000
Note that the $500,000 in intracompany sales have been eliminated.
2. Division A should transfer the 1,000 additional circuit boards to Division
B. Note that Division B’s processing adds $175 to each unit’s selling
price (B’s $300 selling price – A’s $125 selling price = $175 increase),
but it adds only $100 in cost. Therefore, each board transferred to
Division B ultimately yields $75 more in contribution margin ($175 –
$100 = $75) to the company than can be obtained from selling to
outside customers. Thus, the company, as a whole, will be better off if
Division A transfers the 1,000 additional boards to Division B.
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School of International Business
Spring 2025
Advanced Management Accounting
Tutorial 8
Solution:
Exercise 11-4 (15 minutes)
1. and 2.
Northern Southern
Plant Plant Total
Variable cost charges:
$0.25 per ton × 130,000 tons .......................
$ 32,500
$0.25 per ton × 50,000 tons .........................
$ 12,500 $ 45,000
Fixed cost charges:
70% × $300,000 ..........................................
210,000
30% × $300,000 ..........................................
90,000 300,000
Total charges .................................................
$242,500 $102,500 $345,000
3. Part of the $364,000 in total cost will not be charged to the plants, as
follows:
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School of International Business
Spring 2025
Advanced Management Accounting
Tutorial 8
Variable
Cost Fixed Cost Total
Total actual cost incurred ...............................
$54,000 $310,000 $364,000
Total charges (above) .....................................
45,000 300,000 345,000
Spending variance .........................................
$ 9,000 $ 10,000 $ 19,000
The overall spending variance of $19,000 represents costs incurred in
excess of the budgeted $0.25 per ton variable cost and budgeted
$300,000 in fixed costs. This $19,000 in uncharged cost is the
responsibility of the Transport Services Department.