Answer to Question #155791 in Management for Tahir Noman

Question #155791


Question 2


There are two key divisions in a major international organisation. Division Y makes the small component and Division Z makes the finished product, which incorporates one small component. Division Z normally purchases the small component from Division Y. 




Details of the selling prices and costs for each product are:




Small component


£ Finished product


£


Selling Price 66 106


Direct materials 19 10


Transfer price from Y - 66


Direct labour @ £2 per hour 10 6


Variable overhead 5 4


Divisional Fixed Overheads £950,000 £490,000


Outside sales (units) 100,000 25,000


Divisional investment £13,600,000 £2,550,000




Division Z currently has a return on investment below the head office target of 15%. The transfer price of the small component is set at a competitive market price of £66.


After receiving an appeal from the Manager of Division Z to intervene, the Chief Executive asks you to consider a proposal for a 'two-part tariff' transfer price system.






You are required to:




a) Advise the Chief Executive on the appropriateness of the present transfer price system, with supporting calculations of its effects on the respective profitability and returns of each division.


(8 marks)




b) To recommend a basis for the two-part tariff transfer price system, with supporting calculations and comment on its impact on the two divisions.




(9 marks)




c) Comment on why you think the Chief Executive may be reluctant to intervene.



1
Expert's answer
2021-01-19T07:51:26-0500
Dear Tahir Noman, your question requires a lot of work, which neither of our experts is ready to perform for free. We advise you to convert it to a fully qualified order and we will try to help you. Please click the link below to proceed: Submit order

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