The Better Agriculture Group (BAG), which has a divisional structure, produces a range of products for...

  

Transcribed Image Text:

The Better Agriculture Group (BAG), which has a divisional structure, produces a range of products for the farming industry. Divisions B and C are two of its divisions Division B sells a fertiliser product (BF) to customers external to BAG. Division C produces a chemical (CC) which it could transfer to Division B for use in the manufacture of its product BF. However, Division C could also sell some of its output of chemical CC to external customers of BAG. An independent external supplier to the Better Agriculture Group has offered to supply Division B with a chemical which is equivalent to component CC. The independent supplier has a maximum spare capacity of 60,000 kilograms of the chemical which it is willing to make available (in total or in part) to Division B at a special price of £55 per kilogram Forecast information for the forthcoming period is as follows Division B: Production and sales of 350,000 litres of BF at a selling price of £120 per litre Variable conversion costs of BF will amount to £15 per litre. Fixed costs are estimated at £18,000,000. Chemical (CC) is used at the rate of 1 kilogram of CC per 4 litres of product BF. Division C: Total production capacity of 100,000 kilograms of chemical CC. Variable costs will be £50 per kilograms of CC. Fixed costs are estimated at £2,000,000 Market research suggests that external customers of BAG are willing to take up sales of 40,000 kilograms of CC at a price of £105 per kilogram. The remaining 60,000 kilograms of CC could be transferred to Division B for use in product EF. Currently no other market external to BAG is available for the 60,000 kilograms of CC. Required: (a) In order to maximise the profits of BAG, evaluate whether Division B should purchase CC from Division C or the equivalent of CC from the external supplier (b) (c) Assuming that the transfer price for CC is set at £80, assess whether this will lead to goal congruent decisions. Determine the range of transfer prices for CC that will result in goal congruent decisions by Divisions B and C The Better Agriculture Group (BAG), which has a divisional structure, produces a range of products for the farming industry. Divisions B and C are two of its divisions Division B sells a fertiliser product (BF) to customers external to BAG. Division C produces a chemical (CC) which it could transfer to Division B for use in the manufacture of its product BF. However, Division C could also sell some of its output of chemical CC to external customers of BAG. An independent external supplier to the Better Agriculture Group has offered to supply Division B with a chemical which is equivalent to component CC. The independent supplier has a maximum spare capacity of 60,000 kilograms of the chemical which it is willing to make available (in total or in part) to Division B at a special price of £55 per kilogram Forecast information for the forthcoming period is as follows Division B: Production and sales of 350,000 litres of BF at a selling price of £120 per litre Variable conversion costs of BF will amount to £15 per litre. Fixed costs are estimated at £18,000,000. Chemical (CC) is used at the rate of 1 kilogram of CC per 4 litres of product BF. Division C: Total production capacity of 100,000 kilograms of chemical CC. Variable costs will be £50 per kilograms of CC. Fixed costs are estimated at £2,000,000 Market research suggests that external customers of BAG are willing to take up sales of 40,000 kilograms of CC at a price of £105 per kilogram. The remaining 60,000 kilograms of CC could be transferred to Division B for use in product EF. Currently no other market external to BAG is available for the 60,000 kilograms of CC. Required: (a) In order to maximise the profits of BAG, evaluate whether Division B should purchase CC from Division C or the equivalent of CC from the external supplier (b) (c) Assuming that the transfer price for CC is set at £80, assess whether this will lead to goal congruent decisions. Determine the range of transfer prices for CC that will result in goal congruent decisions by Divisions B and C

Answer rating: 100% (QA)

Based on the provided scenario we need to evaluate if Division B should purchase chemical CC from Division C or from the external supplier determine t... View the full answer