Mehlareng (Pty) Limited (aka Mehlareng Group [MG]) is a family owned company that operates from the Tzaneen area of the Limpopo Province. The group operates two divisions, the Tree Plantation Division (TPD) and the WoodWorkx Division (WWD). These divisions are managed by autonomous management teams. The group uses a direct costing method. MG's financial year-end is 30 April. Inventory is valued using the first-in-first-out (FIFO) method. Cost of capital is 12,5% per annum for the TPD and 13,0% per annum for the WWD. The target return on investment (ROI) for each division is the respective cost of capital percentage plus (+) 1,5%. All investment decisions/proposals are quantitatively assessed against the target ROI. All depreciable assets are depreciated at 20% per annum on a straight-line basis. TREE PLANTATION DIVISION (TPD) The TPD owns a five-hectare forestry farm which is subdivided into five plantation sites of one hectare each. The division's total plantation capacity for the five hectares is 12 500 trees. At any given point in time, all the trees within one site are of the same age, however the ageing is different from one site to the next. For example, when trees in site 1 are all two years old, then site 2 trees are all seven years old. Only 20-year-old trees are harvested and only one site is harvested at a time. Irrespective of the site being harvested, the harvest always yields the same number of output (trees). It takes the whole year to fully harvest a site, and once harvested the trees then cut into logs. Each harvested tree produces two logs of approximately the same size (length and width) and weight The production and sales of the logs is as follows: Selling price to external customers per log Total variable cost per log Total fixed cost per annum R270 R125 R1 250 000 Currently the TPD sells 85% of its annual log production to the external customers, however, if it were to sell the logs to the WWD, it will save R2,50 per log on the variable selling cost. WWD requires 4 000 logs per annum for which MG is faced with the following two procurement options for its operations: (WWD can buy the logs exclusively from an outside supplier at a purchase price of R275 per log. This supplier is willing to offer an 8% discount on the purchase price if more than 3 500 logs per annum are bought from them, or (1) WWD's required logs are internally transferred from the TPD, who in turn will need to sacrifice their existing annual sales to external customers accordingly. REQUIRED In respect of the Tree Plantation Division (TPD) (a) Assume that MG decides to adopt procurement option (ii). Calculate the total number of logs that the TPD will have to sacrifice from its existing external customers in order to fully supply WWD's log requirements. (b) Advise which one of the two procurement options will be the most beneficial from the group's (MG) perspective. Ignore qualitative factors. (c) List and briefly explain the transfer pricing method(s) which can be used for intermediate products that have a perfectly competitive market. Mehlareng (Pty) Limited (aka Mehlareng Group [MG]) is a family owned company that operates from the Tzaneen area of the Limpopo Province. The group operates two divisions, the Tree Plantation Division (TPD) and the WoodWorkx Division (WWD). These divisions are managed by autonomous management teams. The group uses a direct costing method. MG's financial year-end is 30 April. Inventory is valued using the first-in-first-out (FIFO) method. Cost of capital is 12,5% per annum for the TPD and 13,0% per annum for the WWD. The target return on investment (ROI) for each division is the respective cost of capital percentage plus (+) 1,5%. All investment decisions/proposals are quantitatively assessed against the target ROI. All depreciable assets are depreciated at 20% per annum on a straight-line basis. TREE PLANTATION DIVISION (TPD) The TPD owns a five-hectare forestry farm which is subdivided into five plantation sites of one hectare each. The division's total plantation capacity for the five hectares is 12 500 trees. At any given point in time, all the trees within one site are of the same age, however the ageing is different from one site to the next. For example, when trees in site 1 are all two years old, then site 2 trees are all seven years old. Only 20-year-old trees are harvested and only one site is harvested at a time. Irrespective of the site being harvested, the harvest always yields the same number of output (trees). It takes the whole year to fully harvest a site, and once harvested the trees then cut into logs. Each harvested tree produces two logs of approximately the same size (length and width) and weight The production and sales of the logs is as follows: Selling price to external customers per log Total variable cost per log Total fixed cost per annum R270 R125 R1 250 000 Currently the TPD sells 85% of its annual log production to the external customers, however, if it were to sell the logs to the WWD, it will save R2,50 per log on the variable selling cost. WWD requires 4 000 logs per annum for which MG is faced with the following two procurement options for its operations: (WWD can buy the logs exclusively from an outside supplier at a purchase price of R275 per log. This supplier is willing to offer an 8% discount on the purchase price if more than 3 500 logs per annum are bought from them, or (1) WWD's required logs are internally transferred from the TPD, who in turn will need to sacrifice their existing annual sales to external customers accordingly. REQUIRED In respect of the Tree Plantation Division (TPD) (a) Assume that MG decides to adopt procurement option (ii). Calculate the total number of logs that the TPD will have to sacrifice from its existing external customers in order to fully supply WWD's log requirements. (b) Advise which one of the two procurement options will be the most beneficial from the group's (MG) perspective. Ignore qualitative factors. (c) List and briefly explain the transfer pricing method(s) which can be used for intermediate products that have a perfectly competitive market