Question

Kick and Rush plc produces footballs for various amateur leagues in South-East England. They consist of two divisions, the leather division which cuts and waterproofs the leather, and the stitching division, which sews the leather together, inserts an air bladder, and sells the footballs to the various league.The leather division prepares the leather in the correct size per football, and charges a transfer price of 17 per unit to the stitching division. This price is based on the current market price for very large wholesale orders less selling and distribution costs which are not applicable in the case of internal transfers. These costs are variable and amount to 3 per unit. The leather division also has access to the external market, where it sells their prepared leather for 20 per (equivalent) unit. These external sales, however, only account for 20 per cent of their total sales volume of 12,000 units per year. The summarized financial details for the leather division for the last year are as follows:

Leather division - combined internal and external sales Sales 216,000 Variable costs (E15 external, {12 internal) 151,200 Contribution 64,800 Fixed cost 35,000 Net profit (loss) 29,800