QUESTION 2 [26 MARKS] Cernol Chemicals is a chemical company based in Windhoek. The company operates in two divisions, Division A and Division B. Division A produces various packaging materials for chemicals that it sells to external customers. Division B plans to introduce a cockroach bait known as the "maxforce". The maxforce will require special syringes. Division A has the capacity to manufacture these syringes and has quoted Division B, N$55 per syringe. There is no external market for the syringes that are produced by Division A. Cernol Chemicals rewards its managers using the return on investment approach. The monthly production for Division A and Division B are as follows: Division A The maximum capacity is 6 000 per month and syringes will be produced in batches of 1 000 units. Each syringe costs N$25 per unit. Incremental fixed costs are budgeted to be N$50 000. Division B The maxiforce will be produced in batches of 1 000 units. Customers will demand 6 000 of maxiforce every month. The variable cost of producing each unit of maxiforce is N$9. This amount excludes the transfer price charged by Division A. Division B will also incur N$75 000 incremental fixed costs for the production of the maxiforce. Each unit of maxiforce uses one syringe. Market research on the potential success of the maxiforce reveals the following price and demand relationship Demand Selling price per unit 1000 2000 3000 4000 5000 6000 REQUIREMENT Subtotal If the transfer price is set at N$55 per syringe, calculate the profit per month that will be reported by each of the divisions and by Cernol chemicals as a whole? 10 Recommend with reasons the course of action that is beneficial to Cernol Chemicals as a whole. Your answer should show the resultant profit that will be reported by Division A. Division B and Cernol Chemicals as a whole. Assuming that the managers of Division A are not happy with your recommendation in (b) above, suggest a transfer pricing policy that would help the company to overcome the problems they are currently facing. QUESTION 2 [26 MARKS] Cernol Chemicals is a chemical company based in Windhoek. The company operates in two divisions, Division A and Division B. Division A produces various packaging materials for chemicals that it sells to external customers. Division B plans to introduce a cockroach bait known as the "maxforce". The maxforce will require special syringes. Division A has the capacity to manufacture these syringes and has quoted Division B, N$55 per syringe. There is no external market for the syringes that are produced by Division A. Cernol Chemicals rewards its managers using the return on investment approach. The monthly production for Division A and Division B are as follows: Division A The maximum capacity is 6 000 per month and syringes will be produced in batches of 1 000 units. Each syringe costs N$25 per unit. Incremental fixed costs are budgeted to be N$50 000. Division B The maxiforce will be produced in batches of 1 000 units. Customers will demand 6 000 of maxiforce every month. The variable cost of producing each unit of maxiforce is N$9. This amount excludes the transfer price charged by Division A. Division B will also incur N$75 000 incremental fixed costs for the production of the maxiforce. Each unit of maxiforce uses one syringe. Market research on the potential success of the maxiforce reveals the following price and demand relationship Demand Selling price per unit 1000 2000 3000 4000 5000 6000 REQUIREMENT Subtotal If the transfer price is set at N$55 per syringe, calculate the profit per month that will be reported by each of the divisions and by Cernol chemicals as a whole? 10 Recommend with reasons the course of action that is beneficial to Cernol Chemicals as a whole. Your answer should show the resultant profit that will be reported by Division A. Division B and Cernol Chemicals as a whole. Assuming that the managers of Division A are not happy with your recommendation in (b) above, suggest a transfer pricing policy that would help the company to overcome the problems they are currently facing
