Question 5

Division A of AB Ltd produces special components which are sold externally or internally to B division. Sales and cost data per unit is given by;

Unit selling price GHS2.50

Unit variable cost GHS1.10

Unit fixed cost GHS0.50

Normal capacity 500,000

During the coming year, division A expects to sell 370,000 units. The manager of Division B is currently planning to buy 150,000 units on the market for GHS2.5 each. Division B manager approach division A manager to sell the 150,000 units. Selling 150,000 units would imply reducing the current external sales. However, if the goods is sold internally, division A can avoid selling cost of GHS0.10 per unit selling internally and that would split the savings by offering a GHS0.05 discount on the usual price.

Required

1. Calculate the range of transfer prices that division A should sell the 150,000 units to division B in order to maximized group profit.
2. Calculate the benefit (or loss) to the company as a whole if the internal transfer takes place.

Assume currently, Division A sell 150,000 units on the external market and the manager of division B offered to pay GHS2, should division A manager accept this price