Transferred-in term (from Division A)29Direct material and components 23Direct labour3Variable overheads12Fixed overheads12Selling and packing expense variable180Division B's manager disagrees with the basis used to set the transfer price. He argues that thetransfers should be made at variable cost plus an agreed (minimal) mark-up since he claims that hisdivision is taking output that Division A would be unable to sell at the price of £30.Partly because of this disagreement, a study of the relationship between selling price and demand hasrecently been made for each division by the company's sales director. The resulting report contains thefollowing table:Customer demand at various selling prices:Division ASelling price£20£30£40Demand15,00010,0005,000Division BSelling price£80£90£100Demand 7,2005,0002,800The manager of Division B claims that this study supports his case. He suggests that a transfer priceof £12 would give Division A a reasonable contribution to its fixed overheads while allowing DivisionB to earn a reasonable profit. He also believes that it would lead to an increase of output and animprovement in the overall level of company profits.
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Marketing,Tutorial,MANAGEMENT ACCOUNTING II,UKAM2043,UTAR,Span and div,Division B,Division A