Answer ALL FOUR questions Question 1 Part A Beta Group Beta Group specialises in the manufacture and sale of motorcycles. Each motorcycle consists of a main unit plus a set of motorcycle fittings. The company is split into two divisions. A and B Division A manufactures the motorcycle and Division manufactures sets of motorcycle fittings. Currently, all of Division A's sales are made externally. Division B. however, sells to Division A as well as to external customers. Both of the divisions are profit centres The following data are available for both divisions: Division A Current selling price for each motorcyde 900 Costs per motorcycle Fittings from Division B 150 Other materials from external suppliers 6400 Labour costs 90 Annual faced overheads 14,8807000 Annual production and sales of motorcycles (units) 80.000 Maximum annual market demand for motorcycles (units) 80,000 Investment 33,625,000 Other relevant information: 1. Three measures are currently used to evaluate the performance of the divisional managers: Retur on Investment (ROI). Residual Income (RI) and net profit margin in relation to sales. The company uses a target Return on Capital of 20% 2 Division A is currently achieving a rate of return well below the target set by the central office. The manager blames this situation on the transfer price. The transfer price charged by Division B to Division A was negotiated some years ago between the previous divisional managers, who have now both been replaced by new managers 3. Head office only allows Division A to purchase its fittings from Division B, although the new manager of Division A believes that he could obtain fittings of the same quality and appearance for 130 per set if he were given autonomy to purchase from outside the company. Division B makes no cost savings from supplying internaly to Division A rather than selling externally Required: a) Advise the management by preparing a profit statement showing the profit for each of the divisions under the current transfer pricing system and performance measures of each division. Your sales and costs figures should be split into external sales and interdivisional transfers, where appropriate (8 Marks) b) Calculate the maximum profit that could be earned by each division and performance measures if the Beta group change the transfer pricing policy to ensure macdimization of company profits without demotivat- ing either of the divisional managers. Division A will be given autonomy to buy from external suppliers and Division B to supply external customers in priority to supplying to Division A (8 Marks) c) Transfer pricing is an accounting practice that represents the price that one division in a company charges another division for goods and services provided. Discuss the importance of setting transfer pricing in com panies (4 Marks) d) There are five methods to determine the transfer pricing Market-based: Marginal cost Full cost Cost- plus a mark-up and Negotiated transfer prices Discuss how to use these methods to determine the transfer price (5 Marks) Total: 25 Marks Division B Current external selling price per set of fittings 160 Current price for sales to Division A 150 Costs per set of fittings Materials f. 10 Labour costs 30 Annual fored overheads 18, 800000 Maximum annual production and sales of sets of frings (units) 200.000 (including internal and external sales) Maudimum annual external demand for sets of fittings (units) 180,000 Maximum annual internal demand for sets of fittings (units) 80.000 Investment 57 250.000 END OF QUESTION 1
