AF3112 - MANAGEMENT ACCOUNTING 2 GROUP PRESENTATION QUESTION (Lecture 10) Required: a. 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: 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: 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: State what production pattern you would recommend to maximize group profit; b. Calculate what profit per annum would be earned from that pattern. a. a. 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 f Variable manufacturing cost, per unit 13 18 Fixed cost, per annum 75,000 105,000 180,000 6 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 products. 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 sold 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 1 unit of Theta uses 1 unit of Sigma uses 1 unit of Omega uses Number of Give Division's products used A B 5 5 3 5 2 2 8 uunto The unit selling prices of this division's products, their other unit variable costs (ie excluding those from Give Division) and apportioned fixed costs per annum are as follows. Selling price, per unit Other variable costs, per unit Fixed cost, per annum Theta 280 30 60,000 Sigma 295 25 90,000 Omega 340 45 120,000 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. AF3112 - MANAGEMENT ACCOUNTING 2 GROUP PRESENTATION QUESTION (Lecture 10) Required: a. 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: 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: 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: State what production pattern you would recommend to maximize group profit; b. Calculate what profit per annum would be earned from that pattern. a. a. 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 f Variable manufacturing cost, per unit 13 18 Fixed cost, per annum 75,000 105,000 180,000 6 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 products. 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 sold 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 1 unit of Theta uses 1 unit of Sigma uses 1 unit of Omega uses Number of Give Division's products used A B 5 5 3 5 2 2 8 uunto The unit selling prices of this division's products, their other unit variable costs (ie excluding those from Give Division) and apportioned fixed costs per annum are as follows. Selling price, per unit Other variable costs, per unit Fixed cost, per annum Theta 280 30 60,000 Sigma 295 25 90,000 Omega 340 45 120,000 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