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- February 8, 2017 at 12:50 pm #371607
please am seeking help on the question below
The Pillercat Corporation is a highly decentralized company. Each division manager has full authority for sourcing decisions and selling decisions. The machining division of Pillercat has been the major supplier of the 2,000 crankshafts that the tractor division needs each year. The tractor division, however, has just announced that it plans to purchase all its crankshafts in the forthcoming year from two external suppliers at $200 per crankshaft.
The machining division of Pillercat recently increased its selling price for the forthcoming year to $220 per unit (from $200 per unit in the current year).
Juan Gomez, manager of the machining division, feels that the 10% price increase is justified. It results from a higher depreciation charge on some new specialized equipment used to manufacture crankshafts and an increase in labor costs. Gomez wants the president of Pillercat Corporation to force the tractor division to buy all its crankshafts from the machining division at the price of $220. The following table summarizes the key data.
Particulars $
Number of crankshafts purchased by tractor division 2,000
External supplier’s market price per crankshaft 200
Variable cost per crankshaft in machining division 190
Fixed cost per crankshaft in machining division 20
Required
1. Compute the advantage or disadvantage in terms of annual operating income to the ePillercat Corporation as a whole if the tractor division buys crankshafts internally from the machining division under each of the following cases:a. The machining division has no alternative use for the facilities used to manufacture crankshafts.
b. The machining division can use the facilities for other production operations, which will result in annual cash operating savings of $29,000.
c. The machining division has no alternative use for its facilities, and the external supplier drops the price to $185 per crankshaft.February 8, 2017 at 3:41 pm #371646This question is on transfer pricing which is not examinable in Paper F2 (it is examined in Paper F5).
If you watch our free lectures on transfer pricing then you will be able to do the question yourself 🙂
(The free lectures are a complete course for Paper F5 and cover everything needed to be able to pass the exam well.) - AuthorPosts
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