Question 2

Parbold Ltd is a well-established company which produces wooden garden furniture sets in its two divisions A and B.

Division A produces the furniture and then transfers them to Division B, who varnish them and sell them to a well-known national retailer for 350 per set of a table and 4 chairs. For the last number of years, the managers of the 2 divisions have communicated well and have been happy with the transfer pricing arrangement, which was set at 175 per furniture set. However, the manager of Division A has recently left Parbold Ltd., for a competitor and the newly appointed manager of Division A is not happy with the transfer price of 175 and believes it should be 200 per set.

He is arguing that the overall profit for the company will also be increased by changing the transfer price to 200. However, Chris, the manager of Division B disputes this and is arguing that the transfer price should remain the same.

Chris is also arguing that the profits of the 2 divisions are not the only measurement of the managers performance.

As the management accountant you have been asked to prepare the information for the next divisional meeting

The budgeted data for the month is:

Division A

Division B 7,000 30,000 15,000 40

20 10

Units transferred/sold Annual fixed costs Allocated Head Office Costs Material costs per unit Labour costs per unit

Other variable costs per unit

Required:

7,000 30,000 10,000 80

40 10

a. Prepare profit statements for each of the divisions and also for the company as a whole, if the transfer price from Division A to B is:

(i) 175 per unit

(ii) 200 per unit (10 marks)

b. If the divisions have investments of 3million each and Parbold Ltd requires a cost of capital of 7%, calculate the Return on Investment (ROI) and Residual Income (RI) for each of the divisions. (5 marks)

c. Non-financial performance indicators (NFPIs) are becoming more popular when measuring performance. Give 4 examples of a NFPI that could be used by Parbold Ltd. (5 marks) Total:20 marks