Part A FK Ltd makes two products which both use the same type of materials and grades
Question:
Part A
FK Ltd makes two products which both use the same type of materials and grades of labour but in different quantities as shown below:
Product X | Product B | |
Labour Hours per unit | 2 | 4 |
Materials – Kg per unit | 5 | 2 |
Demand | 500 | 250 |
Sales price per unit | K60 | K72 |
During each week the maximum number of labour hours available is 1,800 and the quantity of materials available is limited to 3000 Kg. The labour rate is K10 per hour and materials cost K4 per Kg.
REQUIRED: Advise FK Ltd on a profit maximizing production plan.
Part B
A company has two profit centres: A and B. Centre A sells half of its output on the open market and transfers the other half to B. Costs and external revenues in a period are as follows.
A B Total
K’ K K
External sales 16,000 48,000 64,000
Costs of production 24,000 20,000 44,000
Company profit 20,000
REQUIRED: What are the consequences of setting a transfer price at market price?
Expert Answer:
