PRACTICE QUESTION 2: ADAPTED 2012 EXAM A company manufactures and setts a product in open market with fottowing demand anet price relationship: Price per unit N$ 200 N$ 185 N$ 175 Demand (units) 2000 2500 3000 The installed capacity is 3000 units per month. The cost structure for the company is given below at two different levels of output 2000 units 2500 units 150000 Material Labour Manufacturing Overheads Administration Overheads N$ 120000 N$ 80000 N$ 100000 N$ 50000 100000 110000 50000 Recently the management has decided to set up a new division which will use the output of above division as raw material and process it further with additional cost of N$ 50000. It can process and sell 1000 units per month @ 300 per unit. Required: a) Determine the optimum level of external sales for the existing division. Show all details including cost analysis. (10 Marks) b) Manager of new division requests you to transfer 1000 units per month at incremental cost. What would be that transfer price? Would you accept this offer? (4 Marks) c) Suppose the new division is facing tough competition and have to reduce its selling price to N$ 275 per unit. Independent of requirement (a) determine Minimum and maximum transfer price that is goal congruent. (6 Marks) Assuming that actual transfer price is average of minimum and maximum transfer prices, calculate the profit for the company as a whole. (10 Marks)