PRACTICE QUESTION 2: ADAPTED 2012 EXAM Awwwwwwwwwwwwwwwwwwww price relationship Price per unit NS 200 NS 185 NS 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 Material Labour Manufacturing Overheads Administration Overheads NS 120000 NS 80000 NS 100000 NS 50000 150000 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 NS 50000. It can process and sell 1000 units per month 300 per unit. Required: 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 NS 275 per unit. Independent of requirement (a) determine Minimum and maximum transfer price that is goal coneruent. (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)