Question

Ash Ltd has two divisions, Division A and Division B. Division A manufactures component Beta, of which variable cost is £18 per unit. The annual capacity of Division A is 1,900 units and all are transferred to division B. Division B incurs extra cost of £20 to transform component Beta into component Gama, which is sold to the external market for £66 each. Required: I. If the marginal costing pricing approach is used, identify the transfer price, the profit margin of each division, and explain why the manager of division A may consider the transfer price (based on marginal costing) unfair. Suggest any amendments that may be required to make the transfer price a fair price for division A. II. In the case that there is an external demand for 1,000 units of component Beta at a market price of £38, what price could Division A argue should be used as the transfer price and why?

          Ash Ltd has two divisions, Division A and Division B. Division A manufactures component Beta, of which variable cost is £18 per unit. The annual capacity of Division A is 1,900 units and all are transferred to division B. Division B incurs extra cost of £20 to transform component Beta into component Gama, which is sold to the external market for £66 each.  
Required:
I. If the marginal costing pricing approach is used, identify the transfer price, the profit margin of each division, and explain why the manager of division A may consider the transfer price (based on marginal costing) unfair. Suggest any amendments that may be required to make the transfer price a fair price for division A. 
II. In the case that there is an external demand for 1,000 units of component Beta at a market price of £38, what price could Division A argue should be used as the transfer price and why?

Added by Juan Manuel R.

Question

Please give Ace some feedback