Enormous Engineering (EE) Ltd is a large multidivisional engineering company havinginterests in a wide variety of product markets. The industrial Products Division (IPD) sells component parts to consumer appliance manufacturers, both inside and outside the company.One such part, a motor unit, it sells solely to external customers, but buys the motor itselfinternally from the Electronic Motor Division. The Electronic Motor Division (EMD) makes the motor to IPD specifications and it does not expect to be able to sell it to any other customers.

In preparing the 2001 budgets IPD estimated the number of motor units it expects to be able to sell at various prices as follows:

Price ( ex works) Ksh	Quantity sold ( units)
5 000 4 000 3 500 3 000 2 500 2 000	1 000 2 000 3 000 4 000 6 000 8 000

It then sought a quotation from EMD, who offered to supply the motors at Ksh 1 600 each based onthe following estimate:

	Kshs
Materials and bought-in parts	200
Direct labour costs	400
Factory overhead ( 150% of direct labourcosts)	600
Total factory cost	1200
Profit margin (331 on factory cost) /3%	400
Quoted price	1600

Factor overhead costs are fixed. All other costs are variable

Although it considered the price quoted to be on the high side, IPD nevertheless believed that it could still sell the completed unit at a profit because it incurred costs of only Ksh 400 (material Ksh 100 and direct labour Ksh 300) on each unit made. It therefore placed an order for the coming year.

On reviewing the budget for 2001 the finance director of EE noted that the projected sales of themotor unit were considerably less than those for the previous year, which was disappointing as bothdivisions concerned were working well below their capacities. On making entries he was

told by IPD that the price reduction required to sell more units would reduce rather than increaseprofit and that the main problem was the high price charged by EMD. EMD stated that they required the high price in order to meet their target profit margin for the year, and that any reduction woulderode their pricing policy.

Required:

1. Develop tabulations for each division, and for the company as a whole, that indicate theanticipated effect of IPD selling the motor unit at each of the prices listed
2. (i) show the selling price which IPD should select in order to maximize its own divisionalprofit on the motor unit,

(ii) Show the selling price which would be in the best interest of EE as a whole.