Kunal Patil PG 2010-2159

MEDOC CASE

The Medoc company milled flour and manufactured a verity of consumer product from its and outputs are. Milling division 70% market through the market 10% sold to industrial user

Consumer division 20% sold by the milling division to large industrial user 10% was flour transferred to the consumer products division and sold by the division to industrial users.

The milling division and the consumer product division were 2 of 15 investment centers in the Medoc Company. Products were transferred from milling division to consumer product division at a unit price that corresponded to actual cost. There was a variation among the products but the cost remained the same.

Transfer price resulted in friction between milling and the consumer product division When operated at capacity, unit costs were significantly lower. Because the resone is low margin industrial business The CPD complained that MD did not participate in any of the decisions regarding investment. CPD had to pay for production inefficiencies.

A careful study had been made of the possibility of the relating the transfer pricing either to a market price or the price charged by the milling division to it industrial customer because of differences in product composition.

Ans1-The recommendations can be as follows Proper incentives should be given to the consumer product division so that they could increase the volume of the sales by increasing the marketing efforts There should be increase in the promotional activities to increase the marketing efforts. Change in the investment base charged to the consumer production division The involvement between both the divisions should be team based i.e the milling division and the consumer product division. Hiring of the experts is also very necessary so the more of the expertise knowledge is given to them and they can work more efficiently and increase the sales.

Ans2Transfer price should be at unit price that represent actual cost per unit plus it should include some standard expense, actual cost is there so that to control the expenses and standard expense in order to cover up the risk.

Ans3The profits of the milling division and consumer division should be calculated differently to know their position separately. If there are no organizational structure constraints the transfer price could be revised either to the market price or the price charged by the milling division to its industrial customers. The transfer price should be decided taking Non Variable overhead on fractional i.e. monthly basis and 10% of the investment should be borne by the milling division.

Ans4The profit MD and CPD should be calculated on 80% on F. overhead of MD TP should be charged on Full over head+ Fractural STANDARD FOH+10% of the investment by the MD.