Question 4(7 marks)

a) Ally Jones, manager of the Vodafone sales team, has the following budget for her department:

Billings - long distance $350 000

Billings - tele card $70 000

Billings - toll free $260 000

Required: What type of responsibility centre best describes her department, and why? (2 marks)

b) A manufacturing company, Mani Co, has two divisions: Division EX and Division YX. Both divisions make a single standardised product. Division EX makes component TEX, which is supplied to both Division YXand external customers.

Division YX makes product YAS using one unit of component TEX and other materials. It then sells the completed product YAS to external customers. To date, Division YX has always bought component TEX from Division EX.

The following information is available:

	Division EX	Division YX
	$	$
Selling price	40	96
Direct materials: Component TEX		(40)
Direct materials	(12)	(17)
Direct labour	(6)	(9)
Variable overheads	(2)	(3)
Selling and distribution costs	(4)	(1)
Contribution per unit before fixed costs	16	26
Annual fixed costs	$500,000	$200,000
Annual external demand (units)	160,000	120,000
Capacity of plant	300,000	130,000

Division EX charges the same price for component TEXto both Division YX and external customers. However, it does not incur the selling and distribution costs when transferring internally.

Division YX has just been approached by a new supplier who has offered to supply it with component TEX for $36 per unit. Prior to this offer, the cheapest price which Division YX could have bought component TEX for from outside the group was $41 per unit.

It is head office policy to let the divisions operate autonomously without interference at all.

Required:

i) What is the minimum transfer price for component TEX, as per the general transfer pricing rule? (1 mark)

ii) What is the minimum and maximum transfer price which the two divisions can use to negotiate the price for component TEX? (1 mark)

iii) Discuss the problems which will arise if the transfer price remains unchanged. (2 marks)

iv) Advise the divisions on a suitable alternative transfer price for component TEX. (1 mark)