Alligator has two divisions. Adlington Division makes units of Ainslie. These can be sold externally and...
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Alligator has two divisions. Adlington Division makes units of Ainslie. These can be sold externally and are also sold onto the Romero Division which processes them further before selling the finished result onto external customers. (20 marks) External Sales Internal Sales Total Sales Less: Materials Labour Variable overhead Internal transfer costs Fixed overhead Net profit Net profit % Net assets Adlington 630,000 468,750 1,098,750 705,000 252,000 432,000 54,000 Romero 705,000 162,000 900,000 198,750 18.1% 850,000 480,000 Alligator's manufacture director has seen the last set of financial results and has raised concern that Romero Division is performing very poorly and is clearly just "not achieving the target" as it is only just covering its costs and is way off the company target of 15% ROI. He has suggested that the further processing undertaken by this division is not worthwhile and alternative production opportunities should be considered. 8 60,000 120,000 15,000 468,750 37,500 701,250 3,750 0.5% Adlington has a capacity of 100,000 units. Currently it is meeting external demand of 42,000 Ainslies and supplying 30,000 units of Ainslie to Romero. Variable costs in Adlington are $10.25 per unit of Ainslie and total production cost is $12.50 per unit External selling price of the Ainslie is $15 Transfers are made to Romero at full cost + 25% mark up Required (a) Comment on the performance of the two divisions, in light of the manufacture directors view that Romero division's performance is "not up to scratch". (5 marks) (b) It has been suggested that the transfer price should be set at variable cost plus 30%. (10 marks) (i) Comment on the acceptability of this to both Adlington and Romero (ii) Reassess the 2 divisions' performance on this basis and comment on any resulting changes. (c) Explain the opportunity cost approach to transfer pricing. (5 marks) Alligator has two divisions. Adlington Division makes units of Ainslie. These can be sold externally and are also sold onto the Romero Division which processes them further before selling the finished result onto external customers. (20 marks) External Sales Internal Sales Total Sales Less: Materials Labour Variable overhead Internal transfer costs Fixed overhead Net profit Net profit % Net assets Adlington 630,000 468,750 1,098,750 705,000 252,000 432,000 54,000 Romero 705,000 162,000 900,000 198,750 18.1% 850,000 480,000 Alligator's manufacture director has seen the last set of financial results and has raised concern that Romero Division is performing very poorly and is clearly just "not achieving the target" as it is only just covering its costs and is way off the company target of 15% ROI. He has suggested that the further processing undertaken by this division is not worthwhile and alternative production opportunities should be considered. 8 60,000 120,000 15,000 468,750 37,500 701,250 3,750 0.5% Adlington has a capacity of 100,000 units. Currently it is meeting external demand of 42,000 Ainslies and supplying 30,000 units of Ainslie to Romero. Variable costs in Adlington are $10.25 per unit of Ainslie and total production cost is $12.50 per unit External selling price of the Ainslie is $15 Transfers are made to Romero at full cost + 25% mark up Required (a) Comment on the performance of the two divisions, in light of the manufacture directors view that Romero division's performance is "not up to scratch". (5 marks) (b) It has been suggested that the transfer price should be set at variable cost plus 30%. (10 marks) (i) Comment on the acceptability of this to both Adlington and Romero (ii) Reassess the 2 divisions' performance on this basis and comment on any resulting changes. (c) Explain the opportunity cost approach to transfer pricing. (5 marks)
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a The performance of the Adlington Division is satisfactory as it is meeting external demand and gen... View the full answer
Related Book For
Cost Management Accounting and Control
ISBN: 978-0324559675
6th Edition
Authors: Don R. Hansen, Maryanne M. Mowen, Liming Guan
Posted Date:
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