2 (38 marks) Dickson Group has two divisions. The following statement shows the financial result of each division for the year ended 2020. Year 2020 Product type Sales volume Sales revenue Division B Equipment B 72,000 units $000 Division A Component A 140,000 units $000 720,000 196,000 Variable costs (382,000)# (140,000) Contribution 338,000 56,000 Fixed costs 60,000 (20,000) Operating profit 278,000 36,000 #include buying components from Division A. Division A manufactures one type of component only. It sells the components to external customers and also to Division B. The following information is available: Division A Current production capacity Sold to Division B Sold to external markets 140,000 units 72,000 units 68,000 units External market demand for Component A Market price $1500 per unit 112,000 units The current policy of the group is that internal sales 72,000 units should be transferred at their opportunity cost. Consequently, some components were transferred to Division B at the market price $1500 and some were transferred at variable cost of Component A. Required: (a) Prepare an analysis of the sales made by Division A that shows clearly, in units and in $, the internal and external sales made during the year 2020. (10 marks) Internal Sales External Sales Total Units of components Unit price $ $ $000 $000 $000 $000 Sales revenue (b) Assume the current transfer pricing policy continue, what is effect of increase in external sales quantity of Component A on the profits of Division A, Division B and the group respectively. (6 marks) Additional data for Required c, d, and e. Division A is considering buying a new equipment to improve its current production. This would increase production volume by 10% for each of the next five years and also reduce its unit variable costs by 20% for all production output. The capital cost of the new investment is $125 million and it will have no value after five years. The group and its divisional managers evaluate investments using net present value (NPV) with an 8% cost of capital. Assume the sales and production volume of Division B will remain unchanged in the coming five years. Required: Assuming the current transfer pricing policy continues: (c) Prepare an analysis of the sales made by Division A that shows clearly, in units and in $, the internal and external sales if the new investment is implemented. (10 marks) Internal Sales External Sales Total Units of components Unit price $ $ $ $000 $000 $000 $000 Sales revenue (d) If NPV technique is used, evaluate whether Division A manager will agree to buy the new equipment. (6 marks) (e) If NPV technique is used, evaluate whether the group director will agree to buy the new equipment. (6 marks) Discount at 8% Year 1 0.9259 Year 2 0.8573 Year 3 0.7938 Year 4 0.7350 Year 5 0.6806 End of Paper