Ama and Khosi are divisions of Amakhosi Ltd., which is a highly diversified group. Divisions operate as independent profit centers. Ama manufacturers a single component which it sells to the automobile industry while Khosi supplies the wholesale trade with a particular model of air conditioner which it assembles. Due to the slow economic growth in South Africa because of the COVID-19 pandemic, the automobile industry has been struggling and hence, neither division is operating at full capacity. Extracts from the budget for the year ending 30 June 2021 are as follows: Ama units Khosi units Maximum annual capacity 75,000 15,000 Annual production and sales 52,500 9,000 None of the styles is intergroup Standard cost per unit: R R Materials 20.25 1,447.50 Direct labour (variable cost) 18.00 615.00 Overhead-Variable 15.75 135.00 -Fixed 36.00 615.00 90.00 2,812.50 Standard fixed overhead rates or based on budgeted production and are charged as a percentage of direct labour costs. Divisions Ama Khosi R R Market price at budgeted volumes 135 2,900 Both divisions are faced with keen competition, which has been aggravated by the recession. In view of this, it is unlikely that sales can be increased at the budgeted price. However, both managers are of the opinion that in the present circumstances the budgeted price and volume combination will maximize profits. Just before finalising its budget, Khosi was approached by a new customer who has offered to purchase 2,500 units per month at a price of R2,900 each. The units required are a modified version of the existing model and needs some special components. In addition, extra piping at a cost of R52.50 per unit will be needed. The assembly time is expected to increase by 16% hence the direct labour and variable overhead costs will increase proportionately. The managing director (MD) of Khosi is confident that the components which Ama manufacturers could be adapted at minimal cost to meet the specifications for the special order. Amas MD estimates that the adoption would cost an additional R9.00 per component but that did the divisions fixed costs would remain the same. Although no intermediate market exists for the modified components, Amas MD offers to supply Khosi at the market price of the normal component i.e., R135 each. He considers this to be fair because of the additional modification costs. Six components are needed for each new air conditioning unit. PART ONE Calculate the impact of the special order on the budgeted net profit of: (i)The group (ii)The division Ama and Khosi at the transfer price off R135 for each component Calculate the possible range of the transfer price.