1. Division A of Better Margins Ltd. has been given a budgeted target of selling 200,000 components COM 5, it manufactures at a price which would fetch a return of 25% on the average assets employed by it. The following figures are relevant:

Kshs.

Fixed overhead 4,00,000

Variable cost 1 per unit

Average assets:

Sales debtors 2,00,000

Stocks 6,00,000

Plant and other assets 4,00,000

However, the marketing department of the company finds out by a survey that the maximum number of COM 5, the market can take, at the proposed price is only 140,000 units. Fortunately, Division B is willing to purchase the balance 60,000 units. The Manager, Division A is willing to sell to Division B at a concessional price of Ksh. 4 per unit. But the Manager, Division B is ready to pay Ksh. 2.25 only per unit, as he feels he can himself make COM 5 in his Division at that price. Rather than sell to Division B at Ksh. 2.25, the Manager, Division A feels he will restrict the activity of his Division to the manufacture and sale of 140,000 components only. By this, he could reduce Ksh. 80,000 in stocks, Ksh. 120,000 of plant and other assets and Ksh. 40,000 in selling and administration expenses.

Required

As a Managerial Accountant, you are asked to work out the various computations and show that selling 60,000 COM 5 to Division B at Ksh. 2.25 per unit would be in the interest of the organization.