G Group The G Group has a divisionalised structure. One of the divisions manufactures engines and one of the other divisions assembles motor cycles. The performance of the Divisional Managers, and consequently, their bonuses, is based on the return on capital employed (ROCE) of their individual divisions. Both of these divisions operate in highly competitive markets. Motor Cycle Division The motor cycles sell, on average, for £4,000 each. A key component in a motor cycle is the engine. Engines are readily available on the open market but the division currently buys 3,600 engines each year internally from the Engines Division for £1,375 per engine. Other variable costs in producing a motor cycle total £1,200. The manager has just received the following message from the manager of the Engines Division: Engine prices: due to recent cost increases the price per engine will now be £1,600. On receiving the message the manager of the Motor Cycle Division contacted several external engine manufacturers and found one that would supply engines at £1,375 per engine. However, she has since received a directive from the Managing Director of the Group that states she must buy the engines internally. Engines Division Following the recent cost increases, the full absorption cost of a motor cycle engine is £1,450. This includes £400 for fixed production overheads. This type of motor cycle engine is one of many different engines produced by the division. The manager of the Engines Division is aware of the competitive external market that he faces and knows that it will be difficult for him to charge external customers more than £1,375 for a motor cycle engine. However, he is trying to protect his bonus by passing these costs to the Motor Cycle Division. He is keen to make as much profit as he can from these internal sales because the Engines Division is currently working below capacity. Required: (a) Calculate the difference in contribution for each division and the company as a whole between following the head office directive and being able to purchase engines from the external supplier. (b)Discuss the advantages and disadvantages and the behavioural implications of using a dual rate transfer price instead of a transfer price of £1,600.
G Group
The G Group has a divisionalised structure. One of the divisions manufactures engines and one of the other divisions assembles motor cycles. The performance of the Divisional Managers, and consequently, their bonuses, is based on the return on capital employed (ROCE) of their individual divisions. Both of these divisions operate in highly competitive markets.
Motor Cycle Division
The motor cycles sell, on average, for £4,000 each. A key component in a motor cycle is the engine. Engines are readily available on the open market but the division currently buys 3,600 engines each year internally from the Engines Division for £1,375 per engine. Other variable costs in producing a motor cycle total £1,200. The manager has just received the following message from the manager of the Engines Division:
Engine prices: due to recent cost increases the price per engine will now be £1,600.
On receiving the message the manager of the Motor Cycle Division contacted several external engine manufacturers and found one that would supply engines at £1,375 per engine. However, she has since received a directive from the Managing Director of the Group that states she must buy the engines internally.
Engines Division
Following the recent cost increases, the full absorption cost of a motor cycle engine is £1,450. This includes £400 for fixed production
The manager of the Engines Division is aware of the competitive external market that he faces and knows that it will be difficult for him to charge external customers more than £1,375 for a motor cycle engine. However, he is trying to protect his bonus by passing these costs to the Motor Cycle Division. He is keen to make as much profit as he can from these internal sales because the Engines Division is currently working below capacity.
Required:
(a) Calculate the difference in contribution for each division and the company as a whole between following the head office directive and being able to purchase engines from the external supplier.
(b)Discuss the advantages and disadvantages and the behavioural implications of using a dual rate transfer price instead of a transfer price of £1,600.
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