QUESTION 1

In a vertically integrated Group, Division A manufactures a single product which it sells to Divisions B and C as well as to external customers.

Division A has achieved the following results in the period just ended:

Total Sales to Sales to other Divisions

external within the Group

customers to Div B to Div C

Sales:

units (000) 970 310 295 365

price (RM per unit) 6.20 4.00 4.00

value (RM000) 4,562 1,922 1,180 1,460

Cost of Sales (RM000):

variable costs 2,910 930 885 1,095

fixed costs 1,120 358 341 421

4,030 1,288 1,226 1,516

Profit (RM000) 532 634 (46) (56)

Fixed costs are apportioned on the basis of sales units.

The transfer price of RM4.00 is in dispute between the divisions.

REQUIRED

(a) Calculate the revised profit for Division A in the period, if it had refused to supply the product to the other divisions but was unable to make any further sales to external customers.

(3 marks)

(b) Determine the lowest transfer price that Division A could accept.

(5 marks)

(c) Calculate the change in profit for each division, and for the Group, if the transfer price for the period had been RM6.20.

(6 marks)

(d) Explain the term goal congruence, and its relevance to transfer pricing, in the context of the above situation.

(6 marks)

(Total 20 marks)