Advanced: Make or buy decision and intercompany trading Companies RP, RR, RS and RT are members of a group. RP wishes to buy an electronic control system for its factory and, in accordance with group policy, must obtain quotations from com¬ panies inside and outside of the group.

From outside of the group the following quota¬ tions are received:

Company A quoted £33 200.

Company B quoted £35 000 but would buy a special unit from RS for £13 000. To make this unit, however, RS would need to buy parts from RR at a price of £7500.

The inside quotation was from RS whose price was £48 000. This would require RS buying parts from RR at a price of £8000 and units from RT at a price of £30000. However, RT would need to buy parts from RR at a price of £11 000.

Additional data are as follows:

(1) RR is extremely busy with work outside the group and has quoted current market prices for all its products.

(2) RS costs for the RP contract, including purchases from RR and RT, total £42 000. For the Company B contract it expects a profit of 25% on the cost of its own work.

(3) RT prices provide for a 20% profit margin on total costs.

(4) The variable costs of the group companies in respect of the work under consideration are: RR: 20% of selling price RS: 70% of own cost (excluding purchases from other group companies) RT: 65% of own cost (excluding purchases from other group companies)

You are required, from a group point of view, to:

(a) recommend, with appropriate calculations, whether the contract should be placed with RS or Company A or Company B;

(b) state briefly two assumptions you have made in arriving at your recommendations.

(30 marks)

CIMA P3 Management Accounting LO1