Question from the Chartered Association of Certified Accountants, Professional Stage Module E, December 1996. (40 minutes)

Spiro Division is part of a vertically integrated group of divisions all located in one country. All divisions sell externally and also transfer goods to other divisions within the group. Spiro Division performance is measured using profit before tax as a performance measure.

REQUIRED 1. i. Prepare an outline statement which shows the costs and revenue elements which should be included in the calculation of divisional profit before tax. (4 marks)

ii. The degree of autonomy which is allowed to divisions may affect the absolute value of profit reported. Discuss this statement in relation to Spiro Division. (6 marks)

2. Discuss the pricing basis on which divisions should offer to transfer goods in order that corporate profit maximising decisions should take place.

(15 marks) hyut474