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Sir,
Please help to solve this question,
C Co is currently working to full capacity. The Rotech group’s policy is that group companies and divisions must always make internal sales first before selling outside the group. Similarly, purchases must be made from within the group wherever possible. However, the group divisions and companies are allowed to negotiate their own transfer prices without interference from Head Office.
C Co has always charged the same price to the Gearbox division as it does to its external customers. However, after being offered a 5% lower price for similar components from an external supplier, the manager of the Gearbox division feels strongly that the transfer price is too high and should be reduced. C Co currently satisfies 60% of the external demand for its components. Its variable costs represent 40% of revenue.
Required:
Advise, using suitable calculations, the total transfer price or prices at which the components should be supplied to the Gearbox division from C Co.Thank you.
In fact, there is another part of that question which has each division’s and company’s revenue amounts. In that part of the question you will find the purchase done by Gearbox from C co (in the C co data).
I don’t remember the amount now, but something like 7500.
Gearbox manager can buy the same stuff for 7500*0.95 (with 5% discount).C co gets a revenue of 8’000 from external clients and 7500 from Gearbox.
Question comes up: if Gearbox stops buying those components from C co, will C co be able to sell the same quantity of components to external market?
The 8000 that C co sells to external market – it is 60% of the market (per question: “C Co currently satisfies 60% of the external demand for its components”). Now you need to know what is 100%. 8000/0.6 = 13333.So if Gearbox stops buying from C co, C co will sell to external market only:
1) 8000 as before
2) 13333-8000 = 5333 additional (to complete 100% of the market)Now we can see that 5333 is less than 7500 purchased by Gearbox.
So it is in the best interest of C co (and the group as a whole) to lower the price and sell to Gearbox. Otherwise it will be left with $2166 of uncovered sales.I think now you can finish the question.
Karina
The solution is given in the answers and also commented on in the examiners report of the paper. Therefore, it is pointless with only 3 days to go on this paper for any student to regurgitate the answer that is freely available. If you are still unable to understand having read the answer then this is a comprehension issue and you need to re-visit the learning area of this syllabus in my opinion.
Regards
Chris
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