QUESTION 1 In a vertically integrated Group, Division A manufactures a single product which it sells to Divisions B and

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QUESTION 1
In a vertically integrated Group, Division A manufactures a
single product which it sells to Divisions B and C as well as to
external customers.
Division A has achieved the following results in the period just
ended:
Total
Sales
to
Sales to other Divisions
external
within the Group
customers to Div
B to
Div C
Sales:
units
(000)
970
310
295
365
price (RM per
unit)
6.20
4.00
4.00
value
(RM000)
4,562
1,922
1,180
1,460
Cost of Sales (RM000):
variable
costs
2,910
930
885
1,095
fixed
costs
1,120
358
341
421
4,030
1,288
1,226
1,516
Profit
(RM000)
532
634
(46)
(56)
Fixed costs are apportioned on the basis of sales units.
The transfer price of RM4.00 is in dispute between the
divisions.
REQUIRED
(a) Calculate the revised
profit for Division A in the period, if it had refused to supply
the product to the other divisions but was unable to make any
further sales to external customers.
(3 marks)
(b) Determine the lowest
transfer price that Division A could accept.
(5 marks)
(c) Calculate the change
in profit for each division, and for the Group, if the transfer
price for the period had been RM6.20.
(6 marks)
(d) Explain the term
goal congruence, and its relevance to transfer
pricing, in the context of the above situation.
(6 marks)
(Total 20 marks)