# The GHYD company comprises two divisions: GH and YD. GH manufactures components using a specialized machine. It sells the same components both externally and to YD. The variable costs of producing the component are as follows: ...............................................$/unitDirect materials ....................25.00Direct labour ........................35.00Variable overhead ...............10.00............................................70.00 GH currently sells its components to the external market for $125 per unit.GH also sells 4000 components

The GHYD company comprises two divisions: GH and YD. GH manufactures components using a specialized machine. It sells the same components both externally and to YD. The variable costs of producing the component are as follows:

...............................................$/unit

Direct materials ....................25.00

Direct labour ........................35.00

Variable overhead ...............10.00

............................................70.00

GH currently sells its components to the external market for $125 per unit.

GH also sells 4000 components per month to YD. These are transferred at the same price as the external selling price.

YD uses two of these components in each unit of its CX product. The current selling price of the CX product is $375 per unit and at this selling price the demand for the CX is 2000 units per month. The variable costs of producing a unit of CX are as follows:

...........................................................................................$/unit

Direct materials ................................................................35.00

Components transferred from GH @ $125 each ...........250.00

Direct labour .....................................................................15.00

Variable overhead .............................................................10.00

At this level of activity, the total monthly contribution earned by YD from the sale of the CX product is £130 000.

An analysis of the demand for the CX product indicates that for every $25 increase in its selling price the monthly demand would reduce by 500 units, and that for every $25 decrease in its selling price, demand would increase by 500 units.

If P = a = bx then MR = a = 2bx

(a) (i) Calculate the selling price per unit of CX that would maximize the profits generated by that product for the YD division.

(ii) Calculate, based on the selling price you calculated in (a) (i) above, the monthly contribution that CX would generate for:

● GHYD as a whole

● GH division

● YD division

Your answer should show three separate amounts.

(b) GHYD has now reviewed its transfer pricing policy and decided that all transfer prices should be set so as to lead to optimal decision-making for the company

as a whole. Assuming that the transfer price for the component is changed to reflect this new policy:

(i) Calculate the selling price per unit of CX that would maximize the profits earned by CX for the company as a whole. You should assume that there is

sufficient capacity within the company.

(ii) Calculate, based on the selling price you calculated in

(b) (i) above, the monthly contribution that CX would generate for:

● GHYD as a whole

● GH division

● YD division

Your answer should show three separate amounts.

(c) Discuss, using your answers to (a) and (b) above, the impact that alternative transfer prices have on the divisional profits of GH and YD and on the company as a whole.

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