MVideo, Ltd produces televisions. The company operates with two divisions. These are the Electronics Division which...

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MVideo, Ltd produces televisions. The company operates with two divisions. These are the Electronics Division which makes a processor and the Assembly Division which puts together and sells the finished televisions to external customers. The Electronics Division sells one specific type of processor internally to the Assembly Division at a transfer price of £104 made up as follows: Direct Materials Direct Labour 18.00 20.00 Production Overheads Total Cost 42.00 80.00 30% Mark-Up Transfer Price 24.00 104.00 Production Overheads include an absorbed fixed element and a variable element. The variable element is £12 per unit. The Assembly Division incurs further variable costs of £55 per television and estimates the following potential sales at various possible selling prices: Price Sales Volume (Units) 1,500 2,100 2,700 3,000 4,000 £ 400 350 300 250 200 Central management at MVideo have noted that budgeted sales for the television are lower than had been hoped. The Assembly Division management, however, have confirmed that the proposed budget provides the best possible contribution to divisional profits. The Assembly Division have also suggested that a reduction of the transfer price to £65 would improve company profits and would still give the Electronics Division a reasonable contribution. Requirements for question 3: a) Produce a table to show total contribution for both MVideo Ltd overall and for the Assembly Division at each of the five possible prices. Identify the prices which maximise contribution for the company and for the Assembly Division. (12 marks) b) Establish the likely effect on company profits of changing the transfer price to £65 as suggested by the Assembly Division. MVideo, Ltd produces televisions. The company operates with two divisions. These are the Electronics Division which makes a processor and the Assembly Division which puts together and sells the finished televisions to external customers. The Electronics Division sells one specific type of processor internally to the Assembly Division at a transfer price of £104 made up as follows: Direct Materials Direct Labour 18.00 20.00 Production Overheads Total Cost 42.00 80.00 30% Mark-Up Transfer Price 24.00 104.00 Production Overheads include an absorbed fixed element and a variable element. The variable element is £12 per unit. The Assembly Division incurs further variable costs of £55 per television and estimates the following potential sales at various possible selling prices: Price Sales Volume (Units) 1,500 2,100 2,700 3,000 4,000 £ 400 350 300 250 200 Central management at MVideo have noted that budgeted sales for the television are lower than had been hoped. The Assembly Division management, however, have confirmed that the proposed budget provides the best possible contribution to divisional profits. The Assembly Division have also suggested that a reduction of the transfer price to £65 would improve company profits and would still give the Electronics Division a reasonable contribution. Requirements for question 3: a) Produce a table to show total contribution for both MVideo Ltd overall and for the Assembly Division at each of the five possible prices. Identify the prices which maximise contribution for the company and for the Assembly Division. (12 marks) b) Establish the likely effect on company profits of changing the transfer price to £65 as suggested by the Assembly Division.

Answer rating: 100% (QA)

a Electronics Division COST Direct material 18 Direct Labour 20 Production Overheads Variable Element 12 Fixed Element 30 Total Costunit 80 INCOME 30 Markup 24 Transfer Price 104 Assembly Division COS... View the full answer