Assignment 2 - Question 2

Z Limited is a company which is organised into two profit centres, P and Q. At the moment, both profit centres sell all their output to external customers. Monthly data for both profit centres is as follows: P and Q are working at full capacity. The manager of Q is worried about the variable costs of units produced in the department. He is aware that it would be possible, instead of buying raw materials from outside suppliers at a cost of N$18, to receive the output of department P. One unit of output from P would be further processed, at an incremental cost of N\$1 per unit of P's output, and used as a substitute material for 2 units of Q's output. The manager of P has suggested that the transfer price for 2000 units of P should be the market price of N$40 per unit. The manager of Q objects, because this is higher than the cost of raw materials purchased from outside suppliers. As arbitrator from head office, you are aware that if P withdrew 2000 units from sales to the outside market, the outside market price for the remaining output would rise to N$43 per unit. Z Limited is a company which is organised into two profit centres, P and Q. At the moment, both profit centres sell all their output to external customers. Monthly data for both profit centres is as follows: P and Q are working at full capacity. The manager of Q is worried about the variable costs of units produced in the department. He is aware that it would be possible, instead of buying raw materials from outside suppliers at a cost of N$18, to receive the output of department P. One unit of output from P would be further processed, at an incremental cost of N\$1 per unit of P's output, and used as a substitute material for 2 units of Q's output. The manager of P has suggested that the transfer price for 2000 units of P should be the market price of N$40 per unit. The manager of Q objects, because this is higher than the cost of raw materials purchased from outside suppliers. As arbitrator from head office, you are aware that if P withdrew 2000 units from sales to the outside market, the outside market price for the remaining output would rise to N$43 per unit