AF3112 - MANAGEMENT ACCOUNTING 2

Give Division is an important supplier to Take Division in a group in which divisions are operated as autonomous profit centres. The group has established the following rules for calculating transfer prices.

(a) If the product is being sold to customers outside the group, the average price for the past six months is to be used as the transfer price.

(b) If the product is not sold to outside customers, the transfer price to be used is the standard variable cost plus fixed overhead at minimum budgeted volume plus a 10% profit margin on cost.

The following data are available regarding each division,

Give Division

This division produces three products, A, B and C whose variable costs per unit and apportioned fixed costs per annum are as follows.

	A	B	C
Variable manufacturing cost, per unit	6	13	18
Fixed cost, per annum	75,000	105,000	180,000

The direct labour hour content of each of these three products is three direct labour hours per unit, but the materials used are different. The production capacity of the factory is 180,000 direct labour hours and it is a requirement that at least 45,000 direct labour hours be used on each product. The remaining capacity can be used for any combination of three product:

The division has been selling 40% of its output of product A to customers outside the group and the average price over the past six months has been 13 per unit. Product A has also been s0ld to Take Division as has all Give Division's output of products B and C.

Take Division

This division has three products: Theta, Sigma and Omega which use products A, B and C from Give Division as follows.

Take Division's product	Number of Give Division's products used
	A	B	C
1 unit of Theta uses	5	5	-
1 unit of Sigma uses	3	5	2
1 unit of Omega uses	2	-	8

The unit selling prices of this division's products, their other unit variable costs (i.e. excluding those from Give Division) and apportioned fixed costs per annum are as follows.

	Theta	Sigma	Omega
Selling price, per unit	280	295	340
Other variable costs, per unit	30	25	45
Fixed cost, per annum	60,000	90,000	120,000

Take Division has no difficulty in making sales at the above prices and it must sell at least 1,500 per annum of each product. However, because product A is being sold by Give Division to customers outside the group, Take Division has complained that they are operating considerably below capacity.

The group planning executive has therefore intervened and instructed Give Division to stop selling outside the group.

Required: On the basis that all Give Division's production must be sold exclusively to Take Division, do the following. 1) As general manager of Give Division: a. State what proportion pattern you would adopt in your sales to Take Division; b. Calculate what profit per annum would be earned from those sales.

2) As general manager of Take Division: a. State what quantities of products, Theta, Sigma and Omega, you would produce; b. Calculate what profit per annum would be earned from your sales.

3) As group planning executives: a. State what production pattern you would recommend to maximize group profit; b. Calculate what profit per annum would be earned from that pattern.