381ACC Question 2 Barker plc is a divisionalised company with two operating divisions. The Dawson Division makes an intermediate product called the Googly, which can be sold on the open market or transferred to the Tufnell Division for further processing into a product called the Yorker which is sold to external customers at a price of 200 per unit. One unit of the Googly is required for each unit of the Yorker produced. The Executive Board of Barker plc currently requires Dawson Division to transfer its total yearly output of 500,000 units of the Googly to Tufnell Division at a transfer price equivalent to 115% of full manufacturing cost. Tufnell Division can also purchase its full annual requirement of 500,000 units of the Googly on the open market for 100 per unit, and Dawson Division could sell its entire annual output on the open market at the same price. However, Dawson Division would have to pay variable marketing and distribution costs of 4 per unit to sell its output of the Googly on the open market and Tufnell Division would have to pay variable purchasing costs of 2 per unit to buy on the open market. The following table details the budgeted manufacturing costs per unit of the Googly and the Yorker in the Dawson and Tufnell Divisions respectively for the coming year: Dawson Tufnell Division Division (the (the Yorker) Googly) Direct materials 25 14 Direct manufacturing labour costs 20 35 Manufacturing overhead costs 35 40 Manufacturing costs per unit 80 89 Proportion of fixed manufacturing overhead costs 20% 25% Required: (a) Calculate the operating profits for each of the Dawson and Tufnell Divisions and for Barker plc as a whole for the 500,000 units of the Googly transferred under each of the following transfer pricing methods: (i) market price; (472 marks) (ii) 115% of full manufacturing cost. (5% marks) (b) Calculate the impact on the operating profits of Barker plc of Dawson Division selling all its output of the Googly and Tufnell Division purchasing all its requirements of the Googly on the open market. (4 marks) (c) The Executive Board of Barker plc are currently considering increasing the degree of autonomy afforded to operating divisions. Discuss the likely impact of removing the requirement for Dawson Ltd to transfer all its output of the Googly to Tufnell Ltd, and recommend a range of internal transfer prices that would ensure that the operating profit of Barker plc remained optimised. (8 marks) (d) Critically discuss the role of ideal transfer prices in the setting of internal transfer prices between Dawson and Tufnell Divisions and the impacts of the proposed transfer pricing policy on the achievement of the four objectives of transfer pricing. (8 marks) (Total 30 marks) 381ACC Question 2 Barker plc is a divisionalised company with two operating divisions. The Dawson Division makes an intermediate product called the Googly, which can be sold on the open market or transferred to the Tufnell Division for further processing into a product called the Yorker which is sold to external customers at a price of 200 per unit. One unit of the Googly is required for each unit of the Yorker produced. The Executive Board of Barker plc currently requires Dawson Division to transfer its total yearly output of 500,000 units of the Googly to Tufnell Division at a transfer price equivalent to 115% of full manufacturing cost. Tufnell Division can also purchase its full annual requirement of 500,000 units of the Googly on the open market for 100 per unit, and Dawson Division could sell its entire annual output on the open market at the same price. However, Dawson Division would have to pay variable marketing and distribution costs of 4 per unit to sell its output of the Googly on the open market and Tufnell Division would have to pay variable purchasing costs of 2 per unit to buy on the open market. The following table details the budgeted manufacturing costs per unit of the Googly and the Yorker in the Dawson and Tufnell Divisions respectively for the coming year: Dawson Tufnell Division Division (the (the Yorker) Googly) Direct materials 25 14 Direct manufacturing labour costs 20 35 Manufacturing overhead costs 35 40 Manufacturing costs per unit 80 89 Proportion of fixed manufacturing overhead costs 20% 25% Required: (a) Calculate the operating profits for each of the Dawson and Tufnell Divisions and for Barker plc as a whole for the 500,000 units of the Googly transferred under each of the following transfer pricing methods: (i) market price; (472 marks) (ii) 115% of full manufacturing cost. (5% marks) (b) Calculate the impact on the operating profits of Barker plc of Dawson Division selling all its output of the Googly and Tufnell Division purchasing all its requirements of the Googly on the open market. (4 marks) (c) The Executive Board of Barker plc are currently considering increasing the degree of autonomy afforded to operating divisions. Discuss the likely impact of removing the requirement for Dawson Ltd to transfer all its output of the Googly to Tufnell Ltd, and recommend a range of internal transfer prices that would ensure that the operating profit of Barker plc remained optimised. (8 marks) (d) Critically discuss the role of ideal transfer prices in the setting of internal transfer prices between Dawson and Tufnell Divisions and the impacts of the proposed transfer pricing policy on the achievement of the four objectives of transfer pricing. (8 marks) (Total 30 marks)