Question

Company ABC has recently operated in both Spain and France. Found in 2000, ABC has grown steadily over the years to be one of the largest competitors in the ice cream business. Last year, Spain division's machines did not perform adequately; technicians had to spend several weeks adjusting the machines. This led to the fact that Spain's manager had run out of capacity several times and he had been forced to import products from the France division.

The CEO of ABC had decided to set the transfer price at full cost plus a 5% profit for the manufacturer.

Exhibit 5 2009 Ice cream Transfers between France and Spain Ice-cream Cost of ingredients Cost per litre Total (in '000 Euros) 603 Volume transferred (in '000 litres) 1,194 Actual Costs in Euros) Dairy Ingredients Other Ingredients Labor 2.76 1.56 0.09 1.98 0.69 0.09 Allocated Fixed Costs (in Euros) Other costs Depreciation S&A expenses 0.46 0.09 0.04 5% profit margin 0.17 Total transfer price 3.53 2,126

The Spain division had been forced to absorb the expenses of having people travel to France to help fi Spanish containers and packaging to the French production line. The Spain manager did not feel happy about it but had to accept it as a temporary solution.

Was the transfer price charged to Spain fair and in the best of the company? If yes, explain why? If no, explain and propose an alternate transfer pricing mechanism.

Answer 1

No the Transfer price charged to Spain was not fair as the costs included allocated fixed costs also however Allocated Fixed costs should never be added while deciding Fair Transfer Price it only should consist of Relevant costs (That change with respect to decision making)

Also Spain & France belonging to same company should not add profits while calculating Transfer price and only any contribution Loss should be added (in present problem there is no mention about lost contribution)

	Total (in `000 Euros)
Actual costs (in Euros)
Daily ingredients	1,194
Other ingredients	416
Labor	57
Minimum Transfer price	1,667

Please Like the solution if satisfied with the answer and if any query please mention it in comments...thanks