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John Moffat.
John Moffat.-
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xyzc
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Question Man Co (Mar/Jun 16 amended)
For part a) of this question, I am confused as to how the incremental profit/loss should be calculated. How to approach this question and from where to start calculating it.
For part b) of this question, I replaced the cost of component L of 40 with the 37 external purchase price as this was lower. Is it correct. Also , how to draw a profit statement for the group as a whole, e.g. should the selling price of 96 or 40 be used when drawing up the group profit statement.
John Moffat
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For part (a), as far as the group is concerned, the cost of making product L and transferring it internally is 12 + 6 + 2 = $20 per unit (there are no selling and distribution costs when selling internally).
If product L is not make internally but is bought externally then it will cost $37 per unit.
Therefore buying externally will cost the group and extra/incremental cost of 37 – 20 = $17 per unit. So the profit of the group would fall by $17 per unit.
For part (b), the question says to use the current transfer price which is $40 per unit and to use the quantities calculated in (as) which is that M will buy all 120,000 units from L. Therefore the profit is the contribution of $26 per unit less the fixed costs.
The question does not ask for a profit statement for the group as a whole and to prepare one would be wasting time (especially given that there are only 6 marks). As always, the group profit is the total of the profits in the two division.
xyzc
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