Required:

a.) Calculate the profits of each of the divisions and the overall profits in Alice Ltd under the current transfer pricing policy as given in the question. (Include workings on how you derived the transfer price per unit at full cost plus 10%). (8 marks)

b.) If the company grants full autonomy in decision-making to the division managers of Gero and Zino. Evaluate the behavioral implications of the managers’ choice of the transfer price and state whether the transfer from the Gero division to the Zino division will take place.

c.) Calculate the profits of each division and the total profits of Alice Ltd if full autonomy is granted to the division managers. Assume external sales of the Gero Division remained at 25,000 units with no internal transfer sales and all material requirements in Zino Division are purchased from the external supplier. Compare the profits to the answers in part (c). 

d.) Write a report to the management of Alice Ltd, to recommend the transfer price that will promote goal congruence. Assume that both Gero and Zino divisions are decentralized and Gero division is able to increase the external sales to 30,000 units, however, the maximum capacity remains at 50,000 units. The number of units produced and sold by the Zino Division remained unchanged at 25,000 units. Your answers should include a table with the computation of the profits of each division and the total profits for Alice Ltd with the recommended transfer price. Justifications to support your answers are required.

Transcribed Image Text:

Alice Ltd has two divisions, Gero and Zino. Gero Division currently produces material #123 and sells half of its output to Zino Division and the rest were sold externally. Zino Division currently purchased all its material #123 from Gero Division, uses it in its production of Product Zee and sells them to external customer. The current company's policy requires Gero division to transfer at full cost plus 10% rounded to the nearest dollar. It must meet all of Zino division's requirement first, before it sells the balance of its production to the external customers. The maximum capacity of Gero Division is 50,000 units. The following are the data of the divisions: Unit selling price (external sales) Unit direct material costs Unit direct labour costs Unit variable overhead costs Annual fixed costs Gero Division $38 $5 $3 $4 $200,000 Zino Division 50,000 units $60 Material # 123 at transfer price or external supplier's price $4 $11 $120,000 Annual production and sales An external supplier is willing to supply any quantity of material #123 to Zino Division at $35 per unit. 25,000 units Alice Ltd has two divisions, Gero and Zino. Gero Division currently produces material #123 and sells half of its output to Zino Division and the rest were sold externally. Zino Division currently purchased all its material #123 from Gero Division, uses it in its production of Product Zee and sells them to external customer. The current company's policy requires Gero division to transfer at full cost plus 10% rounded to the nearest dollar. It must meet all of Zino division's requirement first, before it sells the balance of its production to the external customers. The maximum capacity of Gero Division is 50,000 units. The following are the data of the divisions: Unit selling price (external sales) Unit direct material costs Unit direct labour costs Unit variable overhead costs Annual fixed costs Gero Division $38 $5 $3 $4 $200,000 Zino Division 50,000 units $60 Material # 123 at transfer price or external supplier's price $4 $11 $120,000 Annual production and sales An external supplier is willing to supply any quantity of material #123 to Zino Division at $35 per unit. 25,000 units

Answer rating: 100% (QA)

a Calculation of divisional and the overall profits of Alice Ltd Particulars Unit sellinf price 18 i... View the full answer