Questions21.qxd English Allied Traders plc has a wide range of manufacturing activities, principally within the UK.

Questions21.qxd

English Allied Traders plc has a wide range of manufacturing activities, principally within the UK. The company operates on the divisionalized basis with each divi- sion being responsible for its own manufacturing, sales and marketing, and work- ing capital management. Divisional chief executives are expected to achieve a target 20% return on sales.

A disagreement has arisen between two divisions which operate on adjacent sites. The Office Products Division (OPD) has the opportunity to manufacture a printer using a new linear motor which has recently been developed by the Electric Motor Division (EMD). Currently there is no other source of supply for an equiva- lent motor in the required quantity of 30 000 units a year, although a foreign manu- facturer has offered to supply up to 10 000 units in the coming year at a price of £9 each. EMD’s current selling price for the motor is £12. Although EMD’s production line for this motor is currently operating at only 50% of its capacity, sales are encouraging and EMD confidently expects to sell 100 000 units in 2001, and its max- imum output of 120 000 units in 2002.

EMD has offered to supply OPD’s requirements for 2001 at a transfer price equal to the normal selling price, less the variable selling and distribution costs that it would not incur on this internal order. OPD responded by offering an alternative transfer price of the standard variable manufacturing cost plus a 20% profit margin. The two divisions have been unable to agree, so the corporate operations director has suggested a third transfer price equal to the standard full manufacturing cost plus 15%. However, neither divisional chief executive regards such a price as fair.

EMD’s 2001 budget for the production and sale of motors, based on its standard costs for the forecast 100 000 units sales, but excluding the possible sales to OPD, is as follows:

Sales Revenue (100 000 units at £12.00 each) 1200

Direct Manufacturing Costs