Question
Mayfair Ltd is a well-established company which produces wooden garden furniture sets inits two divisions A and B. Division A produces the items of furniture
Mayfair Ltd is a well-established company which produces wooden garden furniture sets inits two divisions A and B.
Division A produces the items of furniture and then transfers them to Division B, who varnish them and sell them to a well-known national retailer for 350 per set of a table and 4 chairs. For the last number of years, the managers of the 2 divisions have communicated well and have been happy with the transfer pricing arrangement, which was set at 190 per unit . However, the manager of Division A has recently left Mayfair Ltd., for a competitor and the newly appointed manager of Division A is not happy with the transfer price of 190 and believes it should be 250 per set of furniture.
He argues at the overall profit for the company will also be increased by doing this however, Sarah, the manager of Division B disputes this and is arguing that the transfer price remains the same.
The budgeted data for the month is :
Division A | Division B | |
Units transferred/sold | 6500 | 6500 |
Annual fixed costs | 30,000 | 40,000 |
Allocated Head Office Costs | 12,000 | 22,000 |
Material costs per unit | 65 | 40 |
Labour costs per unit | 45 | 25 |
Other variable costs per unit | 15 | 12 |
a. Prepare profit statements for each of the divisions and also for the company as a whole, if the transfer price from Division A to B is:
(i) 190 per unit
(ii) 250 per unit.
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