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sir in part b division L profit included sales from external market 16 X 120000 but in question it says total group profit as a whole which is company profit but why is external sales in division L included in group profit isnt it L’s own profit and shouldnt be inlcuded in company profit ? and sir in part c in suggesting T.P i calculated minimum T.P as variable cost of making component L as 12+6+2+4=24 and lost contribution to external market as 16 = 40 t.p minimum but its not correct in marking scheme and also this is the current T.P at the moment which has problems .
thankyouL and M are both divisions of the same company. The company profit is the total of that made in the two divisions.
For part (c) if the goods are transferred internally then the selling and distribution costs are not incurred and therefore the marginal for is only 20, giving a minimum transfer price of 20 + 16 = 36.
sorry one more thing . in part a it asks for incremetal profit or loss upon accepting . this is what i did
we make profit before accepting 96-(70) variable plus T.P= 26 per component L
profit after accepting 96 – (67) variable costs of making M and the 37 from external buyer = 29
therefore division M make an incremental loss of 29-26 = 3 per component L upon buying internally
but in marking scheme its something to do with costs only n the answer is different
As far as the group is concerned, the units will be sold at 96 whatever happens, and the other costs in division M (other than component L) remain the same whatever happens.
Therefore the only difference is in the costs. Making component L internally costs the group $20 per unit. Buying component L externally costs the group 37 per unit.
Therefore buying externally costs the group an extra 17 per unit and so the profit for the group falls by 17 per unit.
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