EXERCISE TRANSFER PRICING

1. PT Semen Padang. has two divisions: Kiln Division, and Cement Mill division. Kiln
Division produces Klinker that can be sold to Cement Mill Division and to market.
Kiln Division has a normal capacity of 100.000 kg of Klinker and is only able to sell
to market 60% of its capacity. Cement Mill Division has a normal capacity of 80.000
kg of Cement and is able to sell to market at capacity. Kiln Division sells its product
to market at $ 5 per kg. Manufacturing cost per kg of Klinker and Cement is as
follows:
Klinker Cement
Direct raw material $2 $?
Direct labor cost $ 0.6 $ 1.50
Variable FOH $ 0,40 $ 0.60
Fixed FOH $1 $ 0.40

Kiln Divisions total fixed costs are $ 60.000 per year, and Cement Mill Divisions
total fixed costs are $ 32.000 per year. Selling price of Cement is $ 6 per kg.
Required:
a. If Cement Mill Division can buy Klinker from market at $ 3.75 per kg, and Kiln
Division just want to sell to Cement Mill Division at its market selling price, do
you think that the transfer price will occur?
b. what is maximum transfer price and minimum transfer price?
c. IF Kiln Division agrees with the Klinker price of $ 3,50 per kg as demanded by
Cement Mill Division, what is the impact on division managers performance?
d. Based on question (c) how many units will Kiln Division sell to Cement Mill
Division? What is companys additional profit?

2. Bank Nagari has thirty regional offices and most of them are in west sumatera. It has
made the regional offices as profit centers and has applied the trasnfer price for the
transactions among them. Each regional office manager has full authority to borrow
money from other regional offices or other banks. Bank Nagari s Painan Regional
Office needs fund for Rp 5 billions that will be lent to Palm Plantation company
who agrees to pay interest rate at 18% per year. Bank Nagaris Payakumbuh
Regional Office has the surplus of fund for Rp 6 billions that has been invested to
Central Bank of Indonesia Certificate that has interest rate at 8% per year.
Alternatively, Bank Nagaris Painan Regional Office Manager can borrow money
required from Bank Syariah Mandiri Painan Regional Office with interest rate of
13% per year. So far, Bank Nagaris Payakumbuh Regional Office charges interest
rate for its customers at 16% per year.
Required:
a. What is the maximum transfer price (interest rate)? Minimum transfer price?
Why?
b. What is the ideal transfer price?
c. If Bank Nagaris Payakumbuh Regional Office charges interest rate to Painan
Regional Office at 15% per year, do you think that transfer price will occur? How
is the impact on Bank Nagari performance as a whole?
d. If Bank Nagaris Payakumbuh Regional Office charges interest rate to Painan
Regional Office at 11 % per year, what is the impact on Payakumbuh Regional
Office and Painan Regional Office?