Question

CLUK is a producer of sports nutrition drinks and has two divisions, D1 and D2. Division D1 manufactures recyclable plastic containers which it sells to both Division D2 and also external customers. Division D2 makes high protein drinks which it sells to the retail trade in the containers that it purchases from Division D1.

You have been provided with the following budget information for Division D1:

	$
Selling price to retail customers per 1,000 containers	130
Variable costs per container	0.04
Fixed Costs per annum	2.4 million
Net Assets	4.0 million

Production capacity	40,000,000 containers
Retail demand for containers	38,000,000 containers
Demand for containers from Division D2	20,000,000 containers

You have been provided with the following budget information for Division D2:

	$
Selling per container of protein drink	0.50
Variable costs per drink (excluding container)	0.15
Cost per container (from Division D1)	At transfer price
Fixed Costs	1,750,000
Net assets	12,650.000
Sales volume of protein drinks in containers	20,000,000

Transfer Pricing Policy

Division D1 is required to satisfy the demand of Division D2 before selling containers externally. The transfer price for a container is full cost plus 20%.

Performance Management Targets

Divisional performance is assessed on Return on Investment (ROI) and Residual Income (RI). Divisional managers are awarded a bonus if they achieve the annual ROI target of 25%. CLUK has a cost of capital of 7%.

Required:

REQUIRED:

(a) Produce a three-page PowerPoint presentation to incorporate the following tasks:

(i) SLIDE 1

Using Excel, produce a profit statement for each division detailing sales and costs, separating external sales and inter-divisional transfers. You are advised to produce this statement in a Excel spreadsheet first and then copy this information into the PowerPoint slide

(ii) SLIDE 2

Using Excel, calculate the ROI for division D1 and division D2. Copy this information into Slide 2 of the PowerPoint presentation

(iii) SLIDE 3

Provide a brief commentary on the divisionalised profit statements and ROI results shown in slides 1 and 2

(b) The directors of CLUK are planning to expand the operations of the company and together with the divisional managers, have agreed to purchase a new machine that would increase annual production capacity to 50,000,000 cans at Division D1.

The purchase of this machine will increase the net assets of Division D1 by $500,000. Assume that there is no impact on unit variable costs or fixed costs resulting from this purchase. Inter-divisional transfers will be priced at opportunity cost.

You are required to produce a report to the directors critically discussing the issues and implications of the Transfer Pricing Policy on this investment and divisional profits. You should support your answer with suitable analysis and revised profit statements (these should be included as appendices to your report). Your report should be produced in a Word document containing no more than 1,000 words (+/- 10%).

I need only the (b) part solution. Thank you.

Answer 1

Additional gain if capacity increase from ycocore to crore... Conteribution from Retail sale - 2 E (SP- v.C) Nosofonit z (Hg = .05) 10,009,020 27. Soporo 90000 So by Spending 5oors & into Machine Divisions Con Encorease its profit By 89 osta 9oooo & If the Transfer price folicy change from cost Pius Zot. Mockup to opportunity cost The New berice Will by: Variable cost t benefit to be lost (013-0.04). 04 2 Old Transfer bulce is C. (604+.06) + got. Morkup 012

Division 1 Zagoro 2600ors Revised kecepid Statemen of Sell to Rotallen 2x3000 goud X .13 Sell to do vision Jooo erro n.13. Ravenue from Sell Lesso Variable cost 5oosguro you Contribution Less Riced cost Peopit 65000 2ooor 45000rs gyooero 21000 Division 2 T 10,03,000 Revised Peolit statement of ell to Retailer, lush - 200ours X.5 .- Lees Variable cost 1 20.08 * cost of container o 3000, 0ra R6ooor Les fixed cost, مكي&%. Trofit 175oord 2650000

• if the Management decide to increase Production capacity to perso it will increase the division becofito- hility by around $ Challenge face in transfer beuce. As tele tremsfer price Rise by .o The heabitablity of Division 2 will deconase, but it will not affect the company overall feofitability The Management of Division 2 is need to be convenies for these New Tounser Rüce.