Case Study: Internal Supplies by Kamp Motors
Involves two companies namely:
1. Vecu ▪ A French company that produces cars, Lorries, buses and agricultural machinery.
2. Kamp ▪ One of Vecu’s subsidiaries ▪ An International leader in the field of engine production ▪ Develops racing car engines for many years
Kamp produces four main types of car engines
Type 1 – conventional type / sells externally
Type 2, 3 & 4 – high tech types / sell internally
Financial Data on Kamp Motors 2001 (x €1 million)
Sales = 361
External Cost = 204
Staff = 98
Depreciation = 20
An important order in 2002 (Develop Type 2A engine)
Quantity = 5000 engines
Variable cost per unit = 2500
Full cost per unit =…show more content… In my own opinion the transfer price that Kamp should insist on for the Type 2A engine now is €3450 per unit. This is using the principle of the minimum transfer price which is the variable cost plus the profit if it sells its engines externally then adds the cost of €200 of developing the Type 2A engine. However in the future the price may increase because fixed cost will be added as capacity may become a problem with the expected rise of demand for cars and engines, and also if Kamp is allowed to sell externally the type 2, 3, and 4 engines, so the price in the future should be €4750.
The proposed transfer price now is also lower than the expected prices from Black and FER so it should not be a problem with Guy Mercier who is pressuring Kamp to sell the engine at a reasonable price so that he can raise profit and bonus for his division.
Problem No. 2
Please discuss the possibilities of increasing Kamp’s profit by using the formula for basic cost per unit and by reorganizing. Please use a concrete example to indicate how the board of Kamp can manipulate the unit costs for the types 2, 3, and 4 by reorganizing its cost information system. How, do you think, can the boards of the Vecu concern and the MB division determine whether Kamp manipulates data on unit costs?
Kamp usually supply 4 types of engines, type 2, 3