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Hutter Limited is a small specialist manufacturer of electronic components and much of its output is used by the makers of industrial robotic equipment. One such customer (Schneider plc) has offered a contract to Hutter Limited for the supply, over the next twelve months, of 600 identical components. The data relating to the production of each component are as follows: Material requirements: 4kg of material A1 - see note 1 below 3kg of material B2 - see note 2 below 1 Part No. 981 - see note 3 below Note 1: Material A1 is in continuous use by Hutter Limited. 1,500kg are currently held in stock at a book value of 8.10 per kg but it is known that future purchases will cost 9.70 per kg. Note 2: 2,000kg of material B2 are currently held in inventory. The original cost of this stock was 6.20 per kg but as the material has not been required for the last two years it has been written down to 2.10 per kg scrap value. The only foreseeable alternative use is as a substitute for material B4 (which is currently in regular use by the company) but this would involve further processing costs of 1.80 per kg. The current purchase prices of materials B2 and B4 are 6.30 per kg and 4.10 per kg respectively. Note 3: It is believed that each Part No. 981 can be bought for 34. Labour requirements: Each component would require 4 hours of skilled labour and 3 hours of semi-skilled. A suitable skilled employee is available and is currently being paid 15 per hour. A replacement would, however, have to be hired at a rate of 13 per hour to do the work which would otherwise be done by the skilled employee. The current rate for semi-skilled work is 11 per hour and an additional semi-skilled employee could be hired for this contract. Selling price 180 170 160 150 140 125 Monthly demand from external customers 2,000 units 4,000 units 6,000 units 8,000 units 10,000 units 12,000 units Divisional managers are given a fair amount of autonomy over their pricing, purchasing and output decisions. As far as possible, the divisions are treated as independent business units by the central management of Chawla plc. Divisional managers are rewarded on the basis of the profits that their divisions report. Required a) Using the transfer price of 80, and assuming that Bee Division acts to maximise its own contribution, calculate the monthly profit that would be earned by: i. Bee Division; ii. Aye Division, and ili. The Chawla plc group. (9 marks) b) Calculate the maximum monthly profit for the Chawla plc group (6 marks) c) Explain an alternative transfer pricing system that should satisfy both divisions as well as ensuring that the monthly profits of Chawla plc are maximised. (4 marks) d) Produce profit statements for each of Aye, Bee and Chawla plc that illustrate how your proposed alternative transfer pricing system would achieve the objectives specified in part c). (6 marks) Hutter Limited is a small specialist manufacturer of electronic components and much of its output is used by the makers of industrial robotic equipment. One such customer (Schneider plc) has offered a contract to Hutter Limited for the supply, over the next twelve months, of 600 identical components. The data relating to the production of each component are as follows: Material requirements: 4kg of material A1 - see note 1 below 3kg of material B2 - see note 2 below 1 Part No. 981 - see note 3 below Note 1: Material A1 is in continuous use by Hutter Limited. 1,500kg are currently held in stock at a book value of 8.10 per kg but it is known that future purchases will cost 9.70 per kg. Note 2: 2,000kg of material B2 are currently held in inventory. The original cost of this stock was 6.20 per kg but as the material has not been required for the last two years it has been written down to 2.10 per kg scrap value. The only foreseeable alternative use is as a substitute for material B4 (which is currently in regular use by the company) but this would involve further processing costs of 1.80 per kg. The current purchase prices of materials B2 and B4 are 6.30 per kg and 4.10 per kg respectively. Note 3: It is believed that each Part No. 981 can be bought for 34. Labour requirements: Each component would require 4 hours of skilled labour and 3 hours of semi-skilled. A suitable skilled employee is available and is currently being paid 15 per hour. A replacement would, however, have to be hired at a rate of 13 per hour to do the work which would otherwise be done by the skilled employee. The current rate for semi-skilled work is 11 per hour and an additional semi-skilled employee could be hired for this contract. Selling price 180 170 160 150 140 125 Monthly demand from external customers 2,000 units 4,000 units 6,000 units 8,000 units 10,000 units 12,000 units Divisional managers are given a fair amount of autonomy over their pricing, purchasing and output decisions. As far as possible, the divisions are treated as independent business units by the central management of Chawla plc. Divisional managers are rewarded on the basis of the profits that their divisions report. Required a) Using the transfer price of 80, and assuming that Bee Division acts to maximise its own contribution, calculate the monthly profit that would be earned by: i. Bee Division; ii. Aye Division, and ili. The Chawla plc group. (9 marks) b) Calculate the maximum monthly profit for the Chawla plc group (6 marks) c) Explain an alternative transfer pricing system that should satisfy both divisions as well as ensuring that the monthly profits of Chawla plc are maximised. (4 marks) d) Produce profit statements for each of Aye, Bee and Chawla plc that illustrate how your proposed alternative transfer pricing system would achieve the objectives specified in part c). (6 marks)