SW Limited is a member ofthe SWAL group of companies. SW Limited manufactures cleaning liquid using chemicals that it buys from a number of different suppliers. In the past, SW Limited has used a periodic review stock control system with maximum, minimum and re-order levels to control the purchase ofthe chemicals and the economic order quantity model to minimise its costs.

The Managing Director of SW Limited is thinking about changing to the use of a just-in-time (JIT)

system.

Required:

(a) As Management Accountant, prepare a report to the Managing Director that explains how a JIT system differs from that presently being used and the extent to which its introduction would require a review of SW Limited's quality control procedures.

SW Limited supplies its cleaning liquid to AL Limited, another company in the SWAL group, as well as selling to its external market.
SW Limited has capacity to produce up to 500,000 litres of cleaning liquid per week. The external market demand is 350,000 litres per week, and previously AL Limited demanded 100,000 litres per week. AL Limited has now advised SW Limited that it will require 250,000 litres per week from January 2002.
SWAL group policy:
1. evaluates the performance of group companies on the basis of their individual profits;
2. is to set transfer prices that will encourage the maximisation of group profits.
Required:

(b) Prepare a report to the group Management Team outlining how an appropriate transfer pricing policy would provide a satisfactory basis for appraising the performance of individual companies. Comment on the implications ofthis policy for the maximisation of group profits.