Manuco Ltd has been offered supplies of special ingredient Z at a transfer price of £15 per kg by Helpco Ltd which is part of the same group of companies. Helpco Ltd processes and sells special ingredient Z to customers external to the group at £15 per kg. Helpco Ltd bases its transfer price on cost plus 25 per cent profit mark-up. Total cost has been estimated as 75 per cent variable and 25 per cent fixed.

Required:

Discuss the transfer prices at which Helpco Ltd should offer to transfer special ingredient Z to Manuco Ltd in order that group profit maximizing decisions may be taken on financial grounds in each of the following situations:

(i) Helpco Ltd has an external market for all of its production of special ingredient Z at a selling price of £15 per kg. Internal transfers to Manuco Ltd would enable £1.50 per kg of variable packing cost to be avoided.

(ii) Conditions are as per (i) but Helpco Ltd has production capacity for 3000 kg of special ingredient Z for which no external market is available.

(iii) Conditions are as per (ii) but Helpco Ltd has an alternative use for some of its spare production capacity. This alternative use is equivalent to 2000 kg of special ingredient Z and would earn a contribution of £6000.