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25. METCO

Metco is a company specialising in the manufacture and sale of a range of products for motorists. It is split into two divisions: the battery division (Division B) and the adaptor division (Division A). Division B sells one product – portable battery chargers for motorists which can be attached to a car's own battery and used to start up the engine when the car's own battery fails. Division A sells adaptors which are used by customers to charge mobile devices and laptops by attaching them to the car's internal power source.

Recently, Division B has upgraded its portable battery so it can also be used to rapidly charge mobile devices and laptops. The mobile device or laptop must be attached to the battery using a special adaptor which is supplied to the customer with the battery. Division B currently buys the adaptors from Division A, which also sells them externally to other companies.

The following data is available for both divisions:

Division B

Selling price for each portable battery, including adapter

$180

Costs per battery:

 

Adaptor from Division A

$13

Other materials from external suppliers

$45

Labour costs

$35

Annual fixed overheads

$5,460,000

Annual production and sales of portable batteries (units)

150,000

Maximum annual market demand for portable batteries (units)

180,000

 Division A

Selling price per adaptor to Division B

$13

Selling price per adaptor to external customers

$15

Costs per adaptor:

 

Materials

$3

Labour costs

$4

Annual fixed overheads

$2,200,000

Current annual production capacity and sales of adaptors - both internal and external sales (units)

350,000

Maximum annual external demand for adaptors (units)

200,000

In addition to the materials and labour costs above, Division A incurs a variable cost of $1 per adaptor for all adaptors it sells externally. Currently, Head Office's purchasing policy only allows Division B to purchase the adaptors from Division A, but Division A has refused to sell Division B any more than the current level of adaptors it supplies to it. The manager of Division B is unhappy. He has a special industry contact who he could buy the adaptors from at exactly the same price charged by Division A if he were given the autonomy to purchase from outside the group. After discussions with both of the divisional managers and to ensure that the managers are not demotivated, Head Office has now agreed to change the purchasing policy to allow Division B to buy externally, provided that it optimises the profits of the group as a whole.

Required:

A. Under the current transfer pricing system, prepare a profit statement showing the profit for each of the divisions and for Metco as a whole. Your sales and costs figures should be split into external sales and inter-divisional transfers, where appropriate.

B. Assuming that the new group purchasing policy will ensure the optimisation of group profits, calculate and discuss the number of adaptors which Division B should buy from Division A and the number of adaptors which Division A should sell to external customers.

Note. There are three marks available for calculations and three marks for discussion.

Assume now that no external supplier exists for the adaptors which Division B uses.

C. Calculate and discuss what the minimum transfer price per unit would be for any additional adaptors supplied above the current level by Division A to Division B so that Division B can meet its maximum annual demand for the new portable batteries.

Note. There are two marks available for calculations and three marks available for discussion.

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