Accounting Question

Need 101% correct

If the Company 15 3. Transfer Prices and effect on Divisional decisions - CVP Analysis RII Aipha and Beta are two divisions under the same group of Companies. The production capacity of Alpha is 4,000 kilolitres per month. However, due to external demand considerations, Alpha will be able to utilise 75% of its capacity per month during the year. It will sell one-third of its production to Beta and the balance quantity will be sold in the market. The Variable Cost is? 780 per kilolitre and the Fixed Cost is 2,40,000 per month. The current policy of the Group is to use Market Price as the Transfer Price between the two Divisions. Beta uses the output of Alpha as Raw Materials to produce a branded product which is sold in cans of 25 litre capacity at the rate of 40 per can. The Direct Production Costs are as under- 1. Raw Materials received from Alpha at a Transfer Price of 1 per litre. 2. Variable Costs amount to 6 per can. 3. Fixed Costs amount to 1,60,000 per month. Market Study has revealed that Beta can increase its sale of the branded product by 80% in volume if the Selling Price is reduced by 35 per Can. Alpha proposes that Beta should increase the sales to that extent. Required: 1. Calculate the monthly profit of Alpha and Beta separately and the Company as a whole, if (a) the Sales are at the present level, and (b) the sales of Beta are increased in volume by 80% by reducing the Selling Price by 5 per can. 2. Recommend, with supporting calculations, a suitable Transfer Price which will be acceptable to Beta, so as to maintain the profit as originally envisaged