Selling and distribution costs (4) (1) Question 4 (7 marks) a) Ally Jones, manager of the Vodafone sales team, has the following budget for her depart- ment: Billings - long distance $350 000 Billings - tele card $70 000 Billings - toll free $260 000 Contribution per unit before fixed costs 16 26 Annual fixed costs $500,000 $200,000 Required: What type of responsibility centre best describes her department, and why? (2 marks) Annual external demand (units) 160,000 120,000 Capacity of plant 300,000 130,000 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 YX and 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. Division EX charges the same price for component TEX to both Division YX and external cus- tomers. However, it does not incur the selling and distribution costs when transferring inter- nally. The following information is available: 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. Division EX Division YX $ $ It is head office policy to let the divisions operate autonomously without interference at all. Selling price 40 96 Direct materials: Component TEX (40) Direct materials (12) (17) 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 ne- gotiate the price for component TEX? (1 mark) iii) Discuss the problems which will arise if the transfer price remains unchanged. marks) iv) Advise the divisions on a suitable alternative transfer price for component TEX. (1 mark) Direct labour (6) (9) Variable overheads (2) (3)