HPR harvests, processes and roasts coffee beans. The company has two divisions:

Division P is located in Country Y. It harvests and processes coffee beans. The processed coffee beans are sold to Division R and external customers.

Division R is located in Country Z. It roasts processed coffee beans and then sells them to external customers.

Countries Y and Z use the same currency but have different taxation rates. The budgeted information for the next year is as follows:

Division P

Capacity 1,000 tonnes

External demand for processed coffee beans 800 tonnes

Demand from Division R for processed coffee beans 625 tonnes

External market selling price for processed coffee beans $11,000 per tonne

Variable costs $7,000 per tonne

Annual fixed costs $1,500,000

Division R

Sales of roasted coffee beans 500 tonnes

Market selling price for roasted coffee beans $20,000 per tonne

The production of 1 tonne of roasted coffee beans requires an input of 1.25 tonnes of processed coffee beans. The cost of roasting is $2,000 per tonne of input plus annual fixed costs of $1,000,000.

Transfer Pricing Policy of HPR

Division P must satisfy the demand from Division R for processed coffee beans before selling any to external customers.

The transfer price for the processed coffee beans is variable cost plus 10% per tonne.

Taxation

The rate of taxation on company profits is 45% in Country Y and 25% in Country Z.

REQUIRED:

(a)Illustrate the budgeted profit after tax for the next year for each of the two divisions. Your profit statements should show sales and cost split into external sales and internal transfers where appropriate.