VT Limited is one of several subsidiaries in the GP group of companies. It manufactures electronic control

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Question:

VT Limited is one of several subsidiaries in the GP group of companies. It manufactures electronic control units and sells them both on the open market and to fellow subsidiaries. Recent market research has produced the following figures regarding the elasticity of demand of their TX9 controller.

Selling price 6 7 8 9 10

Demand 30,000 25,000 21,000 16,000 13,000

The standard cost for the TX9 is as follows.

Direct labour 0.20 hrs @ 6/hr 1.20

Direct materials:

1 multi-switch @ 2.50 2.50

1 microchip @ 0.50 0.50

other components 0.20

Overhead 0.1 mc hrs @ 4/mc hr 0.40

Total cost 4.80

Overheads are 90% fixed and 10% variable.

The multi-switches and microchips are supplied by fellow subsidiaries SGN Ltd and MLF Ltd respectively. All the other components are sourced outside the GP group. Cost and pricing data for these two components are as follows.

Unit Costs

SGN LTD Multi-switch

Direct Labour 0.45

Direct Materials 1.15

Overhead 0.40

Full cost 2.00

Internal Transfer Price 2.50

External Market Price 3.50

Unit Costs

MLF LTD Microchip

Direct Labour 0.20

Direct Materials 0.05

Overhead 0.10

Full cost 0.35

Internal Transfer Price 0.50

External Market Price 0.80

SGN are operating at full capacity and have a backlog of orders to fulfil. MLF are short of orders and, if more are not received soon, they may have to make some redundancies.

Required:

a) Based on the market research data, which price volume combination will maximise the total contribution made by the TX9 controller for VT Limited?

b) Assuming the proportion of fixed and variable overheads is the same for all GP's subsidiaries, determine the ideal transfer prices which will maximise profits for the GP group as a whole.

c) Based on your answers to part 2, determine the price-volume combination to maximise the total contribution to VT Ltd.