Sports Design & Manufacturing Limited (SDM) was incorporated in 1996 to make and sell sport apparel, equipment and accessory. After a few initial years of understanding the industry and learning the trade, the company has eventually established itself and is one of the successful enterprises in the sports and related industry. The company is well-known in the industry for its sports apparel as being a manufacturer of quality products at very competitive prices. Over the years, the company has expanded its apparel products to include a wide range of thermal clothing for winter sports. The apparel products are produced in state-of-the-art facilities with advanced precision technology in order to achieve the quality and efficiency needed. A wide network of distributors and retailers like to carry the reputable brands of apparel products made by SDM.

Due to the expansion, SDM purchases large quantities of quality fabric from its suppliers in order to enjoy a good amount of discount so that it can stay competitive in its prices. However, recently it has been difficult for SDM to source for fabric of good enough quality at prices low enough for it to continue its competitiveness. Hence in 2006, armed with sufficient cash, SDM acquired Q-fabric Pte Ltd, one of its fabric suppliers.

Upon completion of the acquisition, SDMs management organized the company into three divisions: Clothing Division (CD), Equipment Division (ED) and Fabric Division (FD). The only purpose of acquiring Q-fabric is to secure and enhance its core raw materials (i.e. fabric). Therefore the Fabric Division has the capacity to produce quality fabric only for the Clothing Division. However, SDMs board of directors has empowered the manager of CD to purchase his fabric from external suppliers if it is cost beneficial to do so and vice versa, the manager of FD to sell his fabric to external customers if it is commercially beneficial.

The managers of all the three divisions have been authorized by SDMs board of directors to make all decisions related to their respective divisions as long as the decisions are in line with the best interests of SDM as a whole.

Below are the cost information of FD (cost per metre of fabric)

Direct material $8

Direct labour $15

Variable overhead $9

Fixed overhead $12

Packaging cost $6

Selling and Administrative (60% variable) $8

Total cost 58

25% mark-up $14.50

Selling / Transfer price $72.50

If CD purchased the fabric from FD, there was no need for packaging cost because FD can simply deliver the fabric in large bins. In addition, 50% of variable selling and administrative costs would not be incurred if the fabric were transferred to CD instead of being sold externally.

Required:

(a) Discuss the possible competitive advantages of Sports Design & Manufacturing using the information given in the question. (10 marks)

(b) Explain why it is necessary to understand the key success factors of Sports Design & Manufacturing in order to implement an appropriate management accounting system. (26 marks)

(c) FD is operating at full capacity because there is demand from external customers for all quantities that FD can produce. If CD is interested to buy from FD, what is the transfer price that FD is willing to charge? Explain your answer and show supporting calculations. (14 marks)