Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A large Company Fastener Limited is organized into several manufacturing divisions. The policy of the company is to allow the Divisional managers to choose their

A large Company Fastener Limited is organized into several manufacturing divisions. The policy of the company is to allow the Divisional managers to choose their sources of supply and when buying from or selling to sister divisions, to negotiate the prices just as they will for outside purchase or sales. Division X buys all of its requirements of its main raw material R from Division Y. The full manufacturing cost of R for Division Y is Rs. 88 per kg at normal volume. Till recently, Division Y was willing to supply R to Division X at a transfer price of Rs. 80 per kg. The incremental cost ( variable cost) of R for Division Y is Rs. 76 per kg. Since Division Y is now operating at its full capacity, it is unable to meet the outside customers demand for R at its market price of Rs. 100 per kg. Division Y therefore threatened to cut off supplies to Division X unless the latter agree to pay the market price for R. Division X is resisting the pressure because its budget based on the consumption of 1, 00,000 per kg per month at a price of Rs. 80 per kg. is expected to yield a profit at Rs. 25,00,000 per month and so a price increase to Rs. 100 per kg. will bring the Division X close to breakeven point. Division X has even found an outside source for a substitute material at a price of Rs. 95 per kg. Although the substitute material is slightly different from R, it would meet the needs of Division X. Alternatively; Division X is prepared to pay Division Y even the manufacturing cost of Rs. 88 per kg. Required: (i) Using each of the transfer price of Rs. 80, Rs. 88, Rs. 95 and Rs. 100 show with supporting calculations, the financial results as projected by the (a) Manager of Division X (b) Manager of Division Y (c) Company

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Intermediate Accounting Volume 2

Authors: Hanlon, Hodder, Nelson, Roulstone, Dragoo

2nd Edition

1618533134, 9781618533357

More Books

Students also viewed these Accounting questions

Question

What is carpal tunnel syndrome?

Answered: 1 week ago