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Budgeting Calculation

In: Business and Management

Submitted By tajine
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1.1 If Division B decides to buy from the other company, what is the impact of the decision on the profits of Division A and the company as a whole, assuming external sales of the product X cannot be increased? What should be done to solve the possible problem? Calculate the unit price of X=45,20 € (of which 22 € variable costs), with the help of which you can calculate: A’s Planned income = 723 200€ A’s Planned costs = 452 000 € A’s Planned Profit = 271 200 € Effects on A [Sales revenues decrease (-) and variables costs decrease (+)] -58 000€ Effects on B (costs decrease) + 13 000€ Effects on the whole firm – 45 000€

1.2 You are required: a) to calculate the monthly profit position for each of L Ltd and M Ltd if the sales of L Ltd are Sales – raw materials – other costs – fixed costs. (i) at their present level, and L Ltd: £ 40 000, M Ltd: £ 60 000 (ii) at the higher potential level indicated by the market research, subject to a cut in price of 20%; L Ltd: £ 32 000, M Ltd: £ 92 000 b) to explain why the use of a market price as the transfer price produces difficulties under the conditions outlined in (a) (ii) above; b) (i) L Ltd is not motivated to reduce selling price, even though the whole firm would be better off, since M Ltd’s profits increase and M Ltd has the needed capacity. (ii) L Ltd needs to have incentive for the change. - Can transfer pricing method be changed to provide the incentives? - Are there savings in selling and distribution to decrease the TP? - Would negotiation be effective? - How important is divisional autonomy? c) to recommend, with supporting calculations, what transfer prices you would propose.  M Ltd has the capacity needed, so transfer price need to be > variable costs  Assuming that we only change the price of the extra 8000 units: L Ltd’s profits increase if its variable costs are reduced more than £1. This is because selling 8000 units more reduced L ltd’s profits by £8000. M Ltd should be able to cover its variable costs to increase its profits. VC= £200/1000l = £0.2/l. One drum needs 25 l -> variable costs £5 per drum. £5 < TP < £8 where TP is the transfer price for the extra units.…...

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