This paper circulates around the core theme of From the point of view of the managing director of AB Company, what price should Division B charge for XK120, and what volume should be sold in order to maximise return on investment for the company as a whole? together with its essential aspects. It has been reviewed and purchased by the majority of students thus, this paper is rated 4.8 out of 5 points by the students. In addition to this, the price of this paper commences from £ 99. To get this paper written from the scratch, order this assignment now. 100% confidential, 100% plagiarism-free.
AB Company specialises in electronic products. Division A makes integrated circuits and sells 90% of its output to outside companies. This division is operating well below capacity.
Division B has developed a new product codenamed XK120 that could use the circuit made by Division A. The manager of Division A has quoted a transfer price of $80 per circuit, which is below the current market price, and which would provide a $40 contribution margin.
The accountant of Division B has provided the following estimates of costs for XK120:
| Materials, including $80 for one circuit |
$200 |
| Direct labour |
20 |
| Factory overhead* |
80 |
| Selling and administrative expenses** |
20 |
| Total cost |
$320 |
* $40 fixed, $40 variable
** $10 fixed, $10 variable
The marketing manager of Division B has submitted the following estimates of their demand schedule for XK120:
| Price |
Demand (units) |
| $400 |
4,000 |
| 325 |
6,000 |
| 300 |
9,000 |
| 250 |
12,000 |
Division A has enough capacity to meet the 12 000 maximum volume that Division B could obtain.
Divisional managers are evaluated on ROI, and total investment would be the same for any of the volumes that Division B may sell.
(a) As the manager of Division B, given the transfer price of $80, what price would you charge for XK120 and what volume would you sell? (3 marks)
(b) Given the price calculated in (a), what total contribution would be earned by:
(i) Division A?
(ii) Division B?
(2 marks)
(d) From the point of view of the managing director of AB Company, what price should Division B charge for XK120, and what volume should be sold in order to maximise return on investment for the company as a whole? (2 marks)
