management accounting-transfer pricing

SECTIONA You must answer ONE question from Section A (Compulsory). You must use ONE WHITE answer sheet per question. To provide an answer that exceeds the space on the answer sheet, please raise your hand to request a YELLOW answer sheet. QUESTION 1 Erskine Electronics (EE) has a wide range of manufacturing activities. EE operates on the divisionalised basis with each division being responsible for its own manufacturing and sales. Divisional managers are expected to achieve a target 20 % return on sales. A disagreement has arisen between two divisions which operate on adjacent sites: Bearsden Division and Clydebank Division. Clydebank Division manufactures USB drives using flash memories, which Bearsden Division produces. Currently, there is no other external source of supply for 70 000 units of flash memories that Clydebank Division requires except for an rish manufacturer that has offered to supply the identical flash memories in the coming year at a price of 8 each. Bearsden Division's maximum production capacity is 200 000 units per annum, and it expects to sell 140 000 units of flash memories to external market at 10 per unit next year. Bearsden Division's budget for the next year for the production and sales of flash memories, which was based on standard costs for the forecast 140 000 units sales excluding the possible sales to Clydebank Division, is as follows. 1,400,000 Sales revenue Direct manufacturing costs Material Labour 490,000 280,000 Indirect manufacturing costs Variable overheads Fixed overheads 140,000 300,000 1,210,000 Total manufacturing costs Distribution costs Total costs Profit 70,000 1.280,000 CONTINUED OVERLEAF Bearsden Division has offered to provide Clydebank Division with the flash memories at the transfer price equal to the external selling price less the distribution costs that it w incur on this internal transaction. Clydebank Division responded by offering an alternative transfer price been unable to agree, so equal to full standard manufacturing cost (with the fixed overhead rate based on the assumption that Bearsden Division's production capacity will be fully utilised) plus 10% mark-up. ould not of variable manufacturing cost plus 20% mark-up. The two Divisions have the EE's headquarter manager has suggested a transfer price REQUIRED: Calculate the transfer price that Bearsden Division has offered. Would Clydebank Division's manager accept this transfer price? Provide the reason why this transf price would (or would not) be accepted by the receiving division. 1.1 (15%) Calculate the transfer price that Clydebank Division has offered. Give an amount, up to which Bearsden Division's manager would accept this transfer price. Give the minimum transfer price that Bearsden Division would accept in excess of this amount. 1.2 (25%) Calculate the transfer price that EE's headquarter manager suggested. 1.3 (10%) (SECTION TOTAL 50%)