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1) Division U makes components which it sells to external customers at a price of £24 per unit, earning a mark up of 20% of total cost. Variable costs account for 40% of Division U’s total cost.
Division U also transfers components at market value to Division V within the same company. Division V incurs extra total costs of £8 per unit to convert and pack the component for international sales. Variable costs account for 70% of Division V’s total cost. Both divisions have surplus capacity. Division V has an opportunity to sell a batch of components to a customer for £15 per unit.Question : Is this potential order acceptable from the company’s point of view and will the manager of Division V make a sub-optimal decision? What will be the minimum and maximum transfer prices for the buying division and selling division?
2) Division M manufactures product R incurring a total cost of £30 per unit. Fixed costs represent 40% of the total unit cost.
Product R is sold to external customers in a perfectly competitive market at a price of £50 per unit. Division M also transfers product R to Division N. If transfers are made internally then Division M does not incur variable distribution costs, which amount to 10% of the variable costs incurred on external sales.
The total demand for product R exceeds the capacity of Division M.Question: From the point of view of the company as a whole, enter the optimum price per unit at which Division M should transfer product R to Division N.
These appear to be past ICAEW Qs rather than ACCA and if you have the Qs presumably you have the answers, with workings? What is it about the model answers that is not clear?
For example in 1), both divisions have surplus capacity so if you can work out that the sum of the variable costs of the two divisions is less than £15 – the order will be acceptable from the company’s perspective. If this is the case, you need to work out whether V will buy the components at market price, given that it will incur a further £8 to make the sale.
Yes it’s ICAEW. Can you explain it to me clearly with your workings? What about part 2?
This is an ACCA forum for FM (F5) and the Qs you have posted I suggest are more involved than you would encounter for 2 marks in F5.
As I only quickly read the Q in making an initial response I did write something that is not correct – I see that the £8 V will incur to make the same is a total cost – it is only the variable element (70%) that is relevant.
So to recap on 1):
Division U variable cost is £8 (40% x 100/120 x £24)
Division V variable cost is £5.60 (70% x £8)
Total variable cost £13.60 – so since selling price is £15 there is positive contribution and the company should want to proceed.
Clearly V will not want to buy in components from U at the current transfer price (market price) of £24 when revenue will be only £15. Bearing in mind that it’s own variable cost is £5.60 – the maximum transfer price it would be prepared to accept is £9.40. (It would actually be indifferent at this price as it would make no contribution.)
The range of acceptable transfer price is therefore £8 – £9.60 – U will not accept anything less than £8 (it’s variable cost) and V will not accept anything more than £9.60.
Calculations are not difficult you just have to be thinking about contribution because only this is relevant for decision making.
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