Avon Ltd. with two manufacturing divisions is organised on profit centre basis. Division A is the only source for the supply of a component that is used in division B in the manufacture of a product, KLIM. One such part is used in each unit of the product, KLIM. As the demand for the product is not steady, division B can obtain orders for increased quantities only by spending more on sales promotion and by reducing the selling prices. The manager of division B has accordingly prepared the following forecast of sales quantities and selling prices:

The manufacturing cost of KLIM in division B is ₹37,500 for the first 1,000 units and ₹7,500 per 1,000 units in excess of 1,000 units.
Division A incurs total cost of ₹15,000 per day for an output upto 1,000 components, and the total costs will increase by ₹9,000 per day for every additional 1,000 components manufactured. The manager of division A states that the operating results of his division will be optimised if the transfer price of component is set at ₹12 per unit, and he has accordingly set the aforesaid transfer price for his supplies of the component to division A.

Required:

(a) Prepare a schedule showing the profitability at each level of output for division A and division B.

(b) Find the profitability of the company as a whole at the output level at which (i) Division A’s net profit is maximum (ii) Division B’s net profit is maximum.

(c) If the company is not organised on profit centre basis, what level of output will be chosen to yield the maximum profit?

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Sales units per day 1,000 2,000 3,000 4,000 5,000 6,000 Average selling price per unit 52.50 39.80 33.00 27.80 24.00 20.10