Mayfair Ltd is a well-established company which produces wooden garden furniture sets in its two divisions A and B. Division A produces the items of furniture and then transfers them to Division B, who varnish them and sell them to a well-known national retailer for £350 per set of a table and 4 chairs. For the last number of years the managers of the 2 divisions have communicated well and have been happy with the transfer pricing arrangement, which was set at £190 per unit. However, the manager of Division A has recently left Mayfair Ltd., for a competitor and the newly appointed manager of division A is not happy with the transfer price of £190 and believes it should be £250 per set of furniture. He is arguing that the overall profit for the company will also be increased by doing this however, Sarah, the manager of Division B disputes this and is arguing that the transfer price remain the same. The budgeted data for the month is: Division A Division B Units transferred/sold 6,500 6,500 Annual fixed costs £30,000 £40,000 Allocated Head Office Costs £12,000 £22,000 Material costs per unit £65 £40 Labour costs per unit £45 £25 Other variable costs per unit £15 £12 Required: a. Prepare profit statements for each of the divisions and also for the company as a whole, if the transfer price from Division A to B is: (i) £190 per unit (ii) £250 per unit
Mayfair Ltd is a well-established company which produces wooden garden furniture sets in its two divisions A and B.
Division A produces the items of furniture and then transfers them to Division B, who varnish them and sell them to a well-known national retailer for £350 per set of a table and 4 chairs. For the last number of years the managers of the 2 divisions have communicated well and have been happy with the transfer pricing arrangement, which was set at £190 per unit. However, the manager of Division A has recently left Mayfair Ltd., for a competitor and the newly appointed manager of division A is not happy with the transfer price of £190 and believes it should be £250 per set of furniture.
He is arguing that the overall profit for the company will also be increased by doing this however, Sarah, the manager of Division B disputes this and is arguing that the transfer price remain the same.
The budgeted data for the month is:
Division A Division B
Units transferred/sold 6,500 6,500
Annual fixed costs £30,000 £40,000
Allocated Head Office Costs £12,000 £22,000
Material costs per unit £65 £40
Labour costs per unit £45 £25
Other variable costs per unit £15 £12
Required:
a. Prepare profit statements for each of the divisions and also for the company as a whole, if the transfer price from Division A to B is:
(i) £190 per unit
(ii) £250 per unit
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