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- This topic has 5 replies, 3 voices, and was last updated 7 years ago by John Moffat.

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- November 28, 2015 at 1:51 pm #285941
Can i have the workings for these questions?

1)Division A has costs of $40 per unit and transfers goods to Division B which has an additional costs of $16 per unit. Division B sells externally at $60 per unit. The company has a policy of setting transfer prices at cost + 20%.

What decisions will the mangers of the two division be motivated to make?

2) A company is starting to produce a new product. The first unit takes 42 hours to produce, and the company has identified learning rate of 80%.

How long will it take to produce an additional 7 units (to the nearest hour)?

November 28, 2015 at 2:33 pm #2859471. Transfer price = 40 + (20% x 40) = 48

A makes a profit (48 – 40) so is motivated to produceB makes a loss (60 – 48 – 16) and so not not motivated to buy,

The free lectures on transfer pricing will explain all this to you.

November 28, 2015 at 2:36 pm #2859482 The average time per unit to make 8 = 42 x 0.8^3 = 21.504 hours

Therefore total time to make 8 = 8 x 21.504 = 172.032

Time to make next 7 = total time for 8 less time for the first = 172.032 – 42 = 130.032 hours

Our free lectures on learning curves include working through an almost identical example.

Our lectures are a complete course for Paper F5 and cover everything you need to pass the exam well.

December 2, 2015 at 10:54 pm #286656Hello sir,

I have problems with this question. Can you teach me how to solve its.

1) A division is considering a capital investment $6.5m. The expected life of the investment is expected to be 40 years, with no resale value at the end of the period. The forecast return on investment 20% per annum before depreciation. The division cost of capital is 10%. What is the expected annual residual income of the initial investment?

2) At the start of the year, a division has non-current assets of $6M and makes no addition or disposals during the year. Depreciation is charged at 10% per annum on all non-current assets. Working capital is $0.75m at the start of the year and is expected to increase by 20% by the end of years. The budgeted profit of the division after depreciation is $1.8m. What is the expected ROI of the division for the year, based on average capital employed?

Thank you.

December 3, 2015 at 7:47 am #287142Q1:

The profit before depreciation = 20% x $6.5M = $1,300,000 p.a.

The depreciation = $6.5M/40 = $162,500 p.a.

Therefore the profit after depreciation = $1,137,500The RI = 1,137,500 – (10% x $6.5M) = $487,500

December 3, 2015 at 7:47 am #287143Q2

Capital employed at the start of the year = $6M + $0.75M = $6.75M

Capital employed at the end of the year = ($6M – (10% x $6M)) + ($0.75M + (20% x $0.75M)) = $6.3MTherefore average capital employed = (6.75 + 6.3) / 2 = $6.525M

Therefore ROI = 1.8 / 6.525 = 27.59%

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