PQ Group comprises two divisions: P and Q. Division P manufactures a product which is transferred to Division Q, where it is converted into the final product for external sale. One unit of the intermediate product is used to make one unit of the final product. The costs of each division are as follows: P Division Q Division Variable cost per unit £2 £5* Fixed costs attributable to the product £2,000 £10,000 Maximum capacity 2,250 2,250 * excluding the cost of the transferred item Market research has produced the following information about possible levels of sales of the final product at a range of prices: Selling price (£) Sales (units) 25.00 1,500 23.50 1,750 22.00 2,000 20.50 2,250 The transfer price for the intermediate product has been set on a full cost-plus basis at £4. Complete the following statements for each Division: Division P Output (units) Revenue £ Variable costs £ Fixed costs £ Profit/(Loss) £ 1,500 1,750 2,000 2,250 Division Q Output (units) Revenues £ Variable costs £ Payment to P £ Fixed costs £ Profit/(Loss) £ 1,500 1,750 2,000 2,250 Identify the profit maximising outputs for each division. Calculate the company profit at each output level and comment on the result. How could the transfer price be used to encourage the divisions to operate at the level which maximises company profits?
PQ Group
PQ Group comprises two divisions: P and Q. Division P manufactures a product which is transferred to Division Q, where it is converted into the final product for external sale. One unit of the intermediate product is used to make one unit of the final product. The costs of each division are as follows:
|
|
P Division |
Q Division |
|
Variable cost per unit |
£2 |
£5* |
|
Fixed costs attributable to the product |
£2,000 |
£10,000 |
|
Maximum capacity |
2,250 |
2,250 |
* excluding the cost of the transferred item
|
Selling price (£) |
Sales (units) |
|
25.00 |
1,500 |
|
23.50 |
1,750 |
|
22.00 |
2,000 |
|
20.50 |
2,250 |
The transfer price for the intermediate product has been set on a full cost-plus basis at £4.
Complete the following statements for each Division:
|
Division P |
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Output (units) |
Revenue £ |
Variable costs £ |
|
Fixed costs £ |
|
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1,500 |
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1,750 |
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2,000 |
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2,250 |
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Division Q |
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|
Output (units) |
Revenues £ |
Variable costs £ |
Payment to P £ |
Fixed costs £ |
Profit/(Loss) £ |
|
1,500 |
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1,750 |
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2,000 |
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2,250 |
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Identify the profit maximising outputs for each division.
Calculate the company profit at each output level and comment on the result.
How could the transfer price be used to encourage the divisions to operate at the level which maximises company profits?
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