march 2020 examiner report question 1

KKanan5y ago

Conference co has a divisionalised structure.one of its divisions, division x, sells all its output to other divisions within the company. Division X's annual budgeted output and costs are as follows Unit sold-1050 DM-22500 DL-45350 Overheads(40%)-37150 what transfer price per unit will result in a profit margin of 20% for division X? Dear tutor, there has not been mentioned about unlimited or limited and i remember in this situation standard cost method which is full cost method. I solved the question which is 125$ ((22500+45350+37150)*100/80)/1050 units=125 what do you think about my comment in this method?I am not meaning calculation.I am meaning about comment section "there has not been mentioned about unlimited or limited and i remember in this situation standard cost method which is full cost method" I could have considered all marginal cost when the question would have mentioned about unlimited capacity or spare capacity?that is why i considered full cost approach which is standard cost only

John MoffatTutor5y ago#1

There are two reasons this question needs to use the full cost and not the marginal cost. One is that they sell all of the output to other divisions and therefore need to cover their fixed costs as well as the variable costs. The other is that the question says they want a profit margin of 20%. If you had been expected to use the variable costs only then they would have written that it was a contribution margin that was required.

KKanan5y ago#2

Thank you very much Dear Tutor very important point!

John MoffatTutor5y ago#3

You are welcome :-)

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