Reference no: EM132774935
Question - AWB Ltd. has two divisions Division W and Division B. Division W produces product Z, which it sells to external market and also to Division B. Divisions in the AWB Ltd. are treated as profit centres and divisions are given autonomy to set transfer prices and to choose their supplier. Performance of each division measured on the basis of target p rofit given for each period.
Division W can produce 1,00,000 units of product Z at full capacity. Demand for product Z in the external market is for 70,000 units only at selling price of '2,500 per unit. To produce product Z Division W incurs '1,600 as variable cost per unit and total fixed overhead of '4,00,00,000. Division W has employed '12,00,00,000 as working capital, working capital is financed by cash credit facility provided by its lender bank @ 11.50% p.a. Division W has been given a profit target of '2,50,00,000 for the year.
Division B has found two other suppliers C Ltd and H Ltd. who are agreed to supply product Z.
Division B has requested a quotation for 40,000 units of product Z from Division W.
Required - Calculate the transfer price per unit of product Z that Division W should quote in order to meet target profit for the year.
Calculate the two prices Division W would have to quote to Division B, if it became AWB Ltd. policy to quote transfer prices based on opportunity costs.
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