Accounting

Problem 13.14 (Profitability of individual cost centres and overall profitability transferred at market price). Fastners Ltd. is having production shops reckoned as cost centres. Each shop charges other shops for material supplied and services rendered. The shops are motivated through goal congruence, autonomy and management efforts. Fastner Limited is having a welding shop and painting shop. The welding shop welds annually 75,000 purchased items with other 1,50,000 shop-made parts into 12,000 assemblies. The assemblies are having total cost of Rs. 9.50 each and are sold in market at Rs. 12 per assembly. Out of the total production, 80% is diverted to painting shop at the same price ruling in the market. Welding shop incurs a fixed cost of Rs. 25,000 per annum. The painting shop is having fixed costs of Rs. 30,000 and its cost of painting including transfer price from welding shop comes to Rs. 20 per unit. This shop sells all units transferred to it by welding shop at Rs. 25 per assembly. You are required to: (a) Find out profit of individual cost centre and overall profitability of the concern. (b) Recommended course of action if painting shop wishes to purchase its full requirement (at market price which is Rs. 10 per assembly) either from open market or from welding shop at market price of Rs. 10 per assembly. Give reasons for you recommendations