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Assignment No.2
Advanced Cost & Management Accounting (MGT705)
Total Marks: 20 Marks Due Date: 25th January, 2016
Question:
Division – A of Zeno Ltd. manufactures a single standardized product. Division – A sold some of the output to the external market whilst the remainder is sold to Division – B of the same organization. In Division – B, it is a subassembly in manufacturing of that Division’s product. The unit costs of Division – A’s product are as follows: Costs Amount (Rs.)
Direct material
7.00
Direct labor
3.50
Direct expenses
3.50
Variable manufacturing expenses
3.50
Fixed manufacturing expenses
7.00
Variable Selling and packing expenses
1.75 Total 26.25
 Annually 17,500 units of the product are sold externally at the standard price of Rs 52.50.
 In addition to external sales, 8,750 units are transferred annually to Division – B at an internal transfer charge of Rs. 50.75 per unit.
 This transfer price is obtained by deducting variable selling and packing expense from the external price.
 Division – B incorporates the transferred-in goods into a more advanced product. The costing detail of that advanced product is as under: Costs Amount (Rs.)
Transferred-in item (from Div – A)
50.75
Direct material and Components
40.25
Direct labor
5.25
Variable Overheads
21.00
Fixed Overheads
21.00
Variable Selling and Packing Expenses
1.75 Total 140.00
 Division – B’s manager disagrees with the basis used to set the transfer price. He argues that the transfers should be made at variable cost plus an agreed – minimal mark-up. He claims that his division is taking output that Division – A would be unable to sell at the price of Rs 52.50. Partly because of this disagreement, a study of the relationship between selling price and demand has recently been made by the sales director. The resulting report contains:
i. Division – A
a. Selling price (Rs.) 35.00 52.50 70.00
b. Demand (units) 26,250 17,500 8,750
ii. Division – B
a. Selling price (Rs.) 140.00 157.50 175.00
b. Demand (Units) 12,600 8,750 4,900
 The manager of Division – B claims that the study supports his case. He suggests that a price of Rs. 21 would give Division – A, a reasonable contribution to its fixed overheads while allowing Division – B to earn a reasonable profit. He also believes that it would lead to an increase in output and an improvement in the overall company profits.
Requirements:
As a student of “Advanced Cost & Management Accounting”, you are required to calculate the effect that the transfer pricing system has had on the company’s profits.

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