section c

portable garage co (mar/jun 18)
b)
If division B buys the adaptors externally, then the additional cost to the group is 13 – 7 = 6. So in order to optimise group profits, division B should first buy the adaptors internally. The maximum annual market demand for division A adaptors is 200000 units. Therefore, the internal sales to division B is 350000 less 200000 which is equal to 150000 adaptors. For the purpose of optimisation of group profits, division B should continue to buy 150000 adaptors from division A. The rest (180000-150000) 30000 adaptors should be bought externally. The sellling price per adaptor to external customers is 15 which is higher than the selling price per adaptor to division B of 13. Alternatively, the minimum transfer price per adaptor is 7 + (15-7) which is 15. The selling price per adaptor to division B is 13 which is lower than the minimum transfer price. So, in order to optimise group profits, division A should first sell adaptors externally and meet the external market demand of 200000 units. It should then sell the remaining 150000 adaptors to division B.
Is the above answer correct or enough for full marks