Question 5
ICAN
•
2024
•
PERFORMANCE MANAGEMENT
•
mixed
Case Stimulus
Zona Tango (ZT) plc is a holding company with four divisions, including Alba and Beta Divisions. Alba Division produces a component that it sells externally, and can also transfer to other divisions within the group. Beta Division uses the components from Alba Division as a raw material for its final product. The division can also obtain the components from external suppliers. The components, when obtained from Alba Division undergoes further processing at a cost of N4.50 per unit, before it is sold to the external market. The Board of Directors in order to implement a new Appraisal Review has set up a performance scheme for the divisional managers. A performance target for the next financial year has been set and the following budgeted information relating to the two divisions has been prepared.
Alba Division
Maximum production/Sales capacity: 900,000 units
Sales to external customers: 700,000 units (Selling price) N6.80 Variable Unit Cost N4.90
Divisional fixed cost: N160,000
Capital employed: N4m
Residue Income: N700,000
Divisional cost of capital: 12%
Beta Division
Maximum production/Sales capacity: (no constraints)
Sales to external customers: (no constraints)
Variable Unit Cost: N4.90
Divisional fixed cost: N140,000
Capital employed: N3m
Residue Income: N500,000
Divisional cost of capital: 10%
Additional Information
{
"label": "Supporting information 1",
"content": "| | Alba Division | Beta Division |\n|----------------------|---------------------|---------------------|\n| Maximum production\/Sales capacity | 900,000 units | (no constraints) |\n| Sales to external customers | 700,000 units | |\n| (Selling price) | ₦6.80 | Variable Unit Cost ₦4.90 |\n| Divisional fixed cost| ₦160,000 | ₦140,000 |\n| Capital employed | ₦4m | ₦3m |\n| Residue Income | ₦700,000 | ₦500,000 |\n| Divisional cost of capital | 12% | 10% |"
}
Requirements
(
a
)
Calculate the transfer price per unit which Alba Division should quote to Beta division in order that its budgeted residual income target will be achieved.
(
b
)
Calculate the selling price per unit which Beta Division should quote to external market in order that its budgeted residual income target will be achieved, based on the transfer price quotation state clearly your assumptions.
(
c
)
Explain why the transfer price calculated in (a) may lead to sub-optimal decision making from the point of view of ZT plc, taken as a whole.
(
d
)
In what circumstances will a negotiated transfer price be used instead of a market based price?
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About This Question
This is
Ican
2024
Performance Management
Question 5.
It is one of the
mixed
questions from the
2024
Ican
Performance Management
examination.