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48 Questions

However the manager of the Sales Department has now stated that he intends to have the repairs done by another

company, RS, because they have offered to carry out the work for a fixed fee of $180 per repair and this is less than

the price that the Sales Department would charge.

Required

(a) Calculate the individual profits of the Sales Department and the Service Department, and of FP as a whole

from the guarantee scheme if:

(i) The repairs are carried out by the Service Department and are charged at full cost plus 40%;(ii) The repairs are carried out by the Service department and are charged at marginal cost;

(iii) The repairs are carried out by RS. (8 marks)

(b) (i) Explain, with reasons, why a 'full cost plus' transfer pricing model may not be appropriate for FP.

(2 marks)

(ii) Comment on other issues that the managers of FP should consider if they decide to allow RS to carry

out the repairs. (3 marks)

(c) SW Limited and AL Limited are members of the same group. SW Limited supplies its output to AL Limited,as well as selling to its external market.

SW Limited has capacity to produce up to 500,000 litres a week. The external market demand is 350,000litres per week, and previously AL Limited demanded 100,000 litres per week. AL Limited has now advisedSW Limited that it will require 250,000 litres per week from January 20X2.

SWAL group policy

Evaluate the performance of group companies on the basis of their individual profits Set transfer prices that will encourage the maximisation of group profits

Required

Explain how an appropriate transfer pricing policy would provide a satisfactory basis for appraising theperformance of individual companies. Comment on the implications of this policy for the maximisation ofgroup profits. (7 marks)

(Total = 20 marks)

56 All Premier Services (FMC, 12/01, amended) 36 mins

All Premier Services is a fee charging hospital that has two specialist wards, X and Y. A third ward, Z, is used forpatients who are well enough to leave wards X and Y but who require a short period of hospital rest before beingdischarged. It is intended that ward Z will be only occupied by patients transferred from the other wards. Budgeteddetails relating to the wards are as follows (fixed and variable costs are for a complete week):

Ward: X Y ZNumber of beds 60 40 45

Budgeted fee per bed per night ($) 225 200 170Budgeted occupancy % 65 80 100

Budgeted costs: $Fixed overheads 127,300Variable overheads 42,412

Fixed overheads are allocated to the wards on the basis of the number of beds available in each ward. Variableoverheads are allocated to beds in proportion to the fees earned per ward.

Required

(a) (i) Prepare a budgeted income statement (based on one week) for each of the wards and for the three

wards combined. Calculate the total cost incurred per bed occupied per week (seven nights).(5 marks)

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