Subsidiary buys inventory from parent at a transfer price of $150 000.The profit margin included in this was $50 000.
The group will need to reduce its cost of sales by $100 000 in total.

Question

Quizplus · Accepted Answer

The profit margin of $50,000 is included in the transfer price of $150,000. To eliminate the profit margin from the group's cost of sales, the cost of sales should be reduced by the profit margin amount, which is $50,000. However, the question states that the group needs to reduce its cost of sales by $100,000, which implies that the entire transfer price is being eliminated from the cost of sales, not just the profit margin.

Subsidiary Buys Inventory from Parent at a Transfer Price of $150