Question 3

GAC Motors is a divisionalized firm with a transfer policy in place. The Aerodynamic Division manufactures a component required by the Motor Assembly Division for which there is currently no external market. One unit of the component is required for every final output. The Motor Assembly Divisions projected selling price and output are as follows;

Net selling price (N)

1500 1300 1200 950 

Quantity sold (Units)

2,000 3,000 4,000 5,000

The costs of each division are as follows:

Variable cost per unit Fixed costs attributable to the product

Aerodynamic (N)

220 1,200,000

Motor Assembly (N)

140 1.800,000

The transfer price for the intermediate product is N700 on cost-plus mark-up basis.

Required:

1. a) Show the profit computations for the divisions and the company as a whole. What is the optimal decision for the firm?

2. b) Suppose that an external market can be found but will result in additional fixed costs of N500,000 and additional variable costs of N40/unit with an external sales price of N900 per unit. How will this affect the decision of the Aerodynamic Division manager?