Explain external sales and inter-divisional transfers, Operation Management

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A company specialising in the manufacture and sale of baths. Each bath consists of a main unit plus a set of bath fittings. The company is split into two divisions, A and B. Division A manufactures the bath and Division B manufactures sets of bath fittings. Currently, all of Division A's sales are made externally. Division B, however, sells to Division A as well as to external customers. Both of the divisions are profit centres. The following data is available for both divisions: Division A Current selling price for each bath 450 Costs per bath: Fittings from Division B 75 Other materials from external suppliers 200 Labour costs 45 Annual fixed overheads 7,440,000 Annual production and sales of baths (units) 80,000 Maximum annual market demand for baths (units) 80,000 Division B Current external selling price per set of fittings 80 Current price for sales to Division A 75 Costs per set of fittings: Materials 5 Labour costs 15 Annual fixed overheads 4,400,000 Maximum annual production and sales of sets of fittings (units) 200,000 (including internal and external sales) Maximum annual external demand for sets of fittings (units) 180,000 Maximum annual internal demand for sets of fittings (units) 80,000 The transfer price charged by Division B to Division A was negotiated some years ago between the previous divisional managers, who have now both been replaced by new managers. Head Office only allows Division A to purchase its fittings from Division B, although the new manager of Division A believes that he could obtain fittings of the same quality and appearance for $65 per set, if he was given the autonomy to purchase from outside the company. Division B makes no cost savings from supplying internally to Division A rather than selling externally. Required: (a) Under the current transfer pricing system, prepare a profit statement showing the profit for each of the divisions and for Bath Co as a whole. Your sales and costs figures should be split into external sales and inter-divisional transfers, where appropriate


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