Question
Fruities Ltd has two divisions, Durian Division and Juice Division. Durian Division has an annual capacity of 10 000 units of durian juice concentrate. Juice
Fruities Ltd has two divisions, Durian Division and Juice Division. Durian Division has an annual
capacity of 10 000 units of durian juice concentrate. Juice Division's annual requirement of durian juice
concentrate is 8000 units. Fruities Ltd requires that divisions should purchase inputs internally where
available, and uses a cost-plus transfer price policy, where transfer price is set at variable cost plus 25
per cent. Therefore, Durian Division always satisfies the demand of the Juice Division first, before
selling the remaining durian concentrate to external suppliers at the market price of $10 per unit. The
variable cost of one unit of durian juice concentrate at Durian Division is $6. The external demand for
What is the difference in Duran Division's profit if a market-price transfer price policy was adopted instead of the cost-plus price policy?
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