XYZ Group, Inc. has two companies – X Ltd, which is operating at just above 50% capacity, and Y Ltd, which is operating at full capacity (7000 production hours). Y Ltd produces two products, A and B, using the same labor force for each product. For the next year its budgeted capacity involves a commitment to the sale of 3000 kg of B, the remainder of its capacity being used on A. Direct costs of these two products are: A($ per kg) B($ per kg) Direct Material 18 14 Direct Wage 15 10 Production Hour (1 hour) (2/3 hour) The company’s overhead is $126 000 per annum relating to A and B in proportion to their direct wages. At full capacity, $70 000 of this overhead is variable. Y Ltd prices its products with a 60% mark-up on its total costs. For the coming year, X Ltd wishes to buy from Y Ltd 2000 kg of product A which it proposes to process and sell, as product Z, for $100 per kg. The direct costs of processing are $15 per kg. X Ltd’s total fixed costs will not change, but variable overhead of $2 per kg will be incurred. You are required to recommend, as group management accountant, to: (a) Determine the minimum transfer price (b) Determine the increase (decrease) in profit of the company as a whole if Y sell 2,000 units of product A to X.
XYZ Group, Inc. has two companies – X Ltd, which is operating at just above 50% capacity, and Y Ltd, which is operating at full capacity (7000 production hours). Y Ltd produces two products, A and B, using the same labor force for each product. For the next year its budgeted capacity involves a commitment to the sale of 3000 kg of B, the remainder of its capacity being used on A. Direct costs of these two products are:
A($ per kg) B($ per kg)
Direct Material 18 14
Direct Wage 15 10
Production Hour (1 hour) (2/3 hour)
The company’s
(a) Determine the minimum transfer price
(b) Determine the increase (decrease) in profit of the company as a whole if Y sell 2,000 units of product A to X.
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