SEMINAR QUESTION - Kick and Rush Plc Kick and Rush Pic produces footballs for various amateur leagues in South-East England. The organisation consists 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 leagues. The leather division prepares the leather in the correct size per foothall and charges a transfer price of f17 per unit to the stitching division. The 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 f3 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 summarised financial details for the leather division for the last year are as follows: Leather division Internal f External E Total f Sales 12,000 x 80% x 163,200 12,000 x 20% x 48,000 211,200 E17 E20 Variable costs 12,000 x 80% x (115,200) 12,000 x 20% x (36,000) (151,200) E12 E15 Contribution 48,000 12,000 60,000 Fixed costs (35,000) Net profit/(loss) 25,000 Recently the English branch of a German leather processing company, Wildleder Plc, has approached the stitching division with a leather product similar in quality for $15 per unit. The director of the stitching division, Charles Valiant-Tailor, now wants to stop all internal purchases and instead obtain the required leather from Wildleder Plc. However, the director of the leather division, Linda Shagreen, states that this price is not feasible for her division to match and that they would not be able to recover more than 33 per cent of the lost internal sales through the external market. The performance of both divisions is measured on the basis of profit generated and neither director is willing to give way on this issue. Head Office needs to step in to resolve this situation. Requirement: a) Appraise the situation after the offer of Wildleder Plc, taking into account the changes in profit and costs, and consider the financial impact on the company. 12,000 x f15 = f180,000 revenue Lost contribution b) Head Office suggests using the same transfer price as the price offered by Wildleder Analyse the outcomes of this suggestion and decide if they are better off compared to the