SM Ltd has two divisions, Division Alpha and Division Gama. Division Alpha manufactures component A, of...

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SM Ltd has two divisions, Division Alpha and Division Gama. Division Alpha manufactures component A, of which variable cost is £20 per unit. The annual capacity of Division Alpha is 2000 units and are transferred all to division Gama. Division Gama incurs extra cost of £20 to transform component A into component C, which is sold to the external market for £70 each. Required: 1. Identify the transfer price if marginal costing is used and explain why the manager of division Alpha may consider it unfair and suggest any amendments that may be required to make the transfer price a fair price for division Alpha. II. In the case that there is an external demand for 1000 units of component A at a market price of £40, what price could Division Alpha argue should be used as the transfer price and why? SM Ltd has two divisions, Division Alpha and Division Gama. Division Alpha manufactures component A, of which variable cost is £20 per unit. The annual capacity of Division Alpha is 2000 units and are transferred all to division Gama. Division Gama incurs extra cost of £20 to transform component A into component C, which is sold to the external market for £70 each. Required: 1. Identify the transfer price if marginal costing is used and explain why the manager of division Alpha may consider it unfair and suggest any amendments that may be required to make the transfer price a fair price for division Alpha. II. In the case that there is an external demand for 1000 units of component A at a market price of £40, what price could Division Alpha argue should be used as the transfer price and why?

Answer rating: 100% (QA)

I Under marginal costing the transfer price would be the variable cost of producing ... View the full answer