Fruities Ltd Has Two Divisions,Durian Division and Juice Division

question 32

Multiple Choice

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.What is the difference in Durian Division's profit under the cost-plus transfer price policy and a market-price transfer price policy?

• A) Fruities Ltd's profit is $20 000 lower under the cost-plus transfer pricing approach
• B) Fruities Ltd's profit is $20 000 higher under the cost-plus transfer pricing approach
• C) Fruites Ltd's profit is $25 000 higher under the cost-plus transfer pricing approach
• D) There is no difference under the two policies.

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Definitions:

FOB Shipping Point

A term indicating that the buyer takes ownership of goods being shipped to them at the point of departure from the seller's shipping dock.

Invoice

A document issued by a seller to a buyer that lists the products or services provided, along with quantities, prices, and payment terms.

Net Price Method

An accounting method that records purchases at the net price, after deducting any discounts, rather than recording them at the gross price.