04. The Portable Garage Co (PGC) is a company specialising in the manufacture and sale of a range of products for motorists. It is split into two divisions: the battery division (Division B) and the adaptor division (Division A). Division B sells one product - portable battery chargers for motorists which can be attached to a car's own battery and used to start up the engine when the car's own battery fails. Division A sells adaptors which are used by customers to charge mobile devices and laptops by attaching them to the car's internal power source Recently, Division B has upgraded its portable battery so it can also be used to rapidly charge mobile devices and laptops. The mobile device or laptop must be attached to the battery using a special adaptor which is supplied to the customer with the battery. Division B currently buys the adaptors from Division A, which also sells them externally to other companies. The following data is available for both divisions: Division B Selling price for each portable battery, including adaptor $180 Costs per battery Adaptor from Division A Other materials from external suppliers Labour costs $13 $45 $35 Annual fixed overheads $5,460,000 Annual production and sales of portable batteries (units) 180,000 Division A $13 $15 Selling price per adaptor to Division B Selling price per adaptor to external customers Costs per adaptor: Materials $3 Labour costs $4 Annual fixed overheads $2,200,000 Current annual production capacity and sales of adaptors - both internal and external sales (units) 350,000 Maximum annual external demand for adaptors (units) 200,000 In addition to the materials and labour costs above, Division A incurs a variable cost of $1 per adaptor for all adaptors it sells externally Currently, Head Office's purchasing policy only allows Division B to purchase the adaptors from Division A due to this division A has been failed to satisfy external demand. Division B has a special industry contact who he could buy the adaptors from at exactly the same price charged by Division A i.e. $13 if he were given the autonomy to purchase from outside the group. After discussions with both of the divisional managers and to ensure that the managers are not demotivated, Head Office has now agreed to change the purchasing policy to allow Division B to buy externally, provided that it optimises the profits of the group as a whole. 5 Required: (a) Under the current transfer pricing system, prepare a profit statement showing the profit for each of the divisions and for The Portable Garage Co (PGC) as a whole. Your sales and costs figures should be split into external sales and inter-divisional transfers, where appropriate. (5 marks) (b) Assuming that the new group purchasing policy will ensure the optimisation of group profits, calculate and discuss the number of adaptors which Division B should buy from Division A and the number of adaptors which Division A should sell to external customers. Prepare revised profit statements of A and B. (7 marks)