Subject: PERFORMANCE MANAGEMENT

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PM – Nov 2024 – L2 – Q7b – Divisional Performance Measurement

Evaluating division performance using ROI and residual income methods with adjusted cost of capital.

Ngerige and Sons Limited has four operating divisions spread across four cities in Nigeria: Lagos, Kano, Gombe, and Enugu. These divisions are treated as investment centres for performance reporting purposes. The following information is available:

Particulars Lagos Kano Gombe Enugu
Divisional Investment (N) 10,000,000 4,000,000 3,000,000 7,000,000
Divisional Sales (N) 53,000,000 23,000,000 24,600,000 29,400,000
Divisional Variable Costs (N) 50,000,000 22,000,000 23,400,000 27,400,000
Specific Fixed Costs (N) 1,500,000 750,000 600,000 800,000

The company’s annual general fixed cost is N1,300,000, apportioned to divisions based on sales. The cost of capital for Ngerige and Sons Limited is 7.5%. Ignore taxation.

Required:

i. Evaluate the performance of the divisions using the following methods:

  • ROI method. (3 Marks)
  • Residual Income Method. (3 Marks)

ii. Re-evaluate the residual income situation for the company given an adjusted cost of capital of 10%. (3 Marks)

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PM – Nov 2024 – L2 – Q7a – Divisional Performance Measurement

Definitions of Responsibility Accounting, Investment Centre, Return on Investment (ROI), and Residual Income.

Define the following concepts:

i. Responsibility accounting
ii. An investment centre
iii. Return on Investment (ROI)
iv. Residual income

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PM – Nov 2024 – L2 – Q6 – Divisional Performance Measurement

Comparative analysis of Owerri and Isiekenesi event centers based on financial performance metrics

Omegboje and company is a medium-scale outfit that specializes in the rental business in Owerri and Isiekenesi towns. The company operates a large event center in each city, supplying chairs, tables, and canopies for both outdoor and some indoor events.

Each event center manager has some independence in operations and earns a performance bonus of 10% of sales if they achieve more than the standard return on capital employed (ROCE) of 50%.

The following financial data is available for the two centers for the years ending December 31, 2020, and 2019:

Additional Information:

  1. Revenue is derived from rentals and ancillary services.
  2. Both centers have a cost of capital of 15%.
  3. Ignore taxation and inflation.

Required:

a. Discuss the relative performance of the two centers based on: i. Return on Capital Employed (ROCE) ii. Residual Income iii. Profit Margin iv. Current Ratio v. Quick Ratio vi. Gearing Ratio vii. Interest Cover
(7 Marks)

b. Compute the performance bonus for the centers (if any), showing your workings.
(4 Marks)

c. Briefly outline the role of a Management Accountant in project management.
(4 Marks)

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PM – Nov 2024 – L2 – Q1 – Decision-Making Techniques

Optimization of Oshimiri Nigeria Limited's production plan to maximize profits under resource constraints using linear programming.

Oshimiri Nigeria Limited, a company based in Aba, produces two grades of industrial vanish. The selling price and associated unit variable costs for vanish Grade A and Grade B are shown below:

Particulars Grade A Grade B
Selling Price N2,100 N1,500
Material X (N240/kg) N480 N240
Skilled Labour (N144/hr) N720 N288
Unskilled Labour (N60/hr) N120 N180
Variable Overhead (N84/machine hr) N168 N336

The fixed overhead costs are N2,600,000 per month. The company plans to maximize profits.

The availability of resources for the following month is as follows:

  • Material X: 25,000 Kg
  • Skilled Labour: 48,000 hours
  • Unskilled Labour: 39,000 hours
  • Machine hours: 50,000 hours

Required:

a. Identify the objective function and the constraints of the model to be used in determining the optimum production plan for the following month. (5 Marks)

b. Determine the optimum production plan for the month and the associated profit. (5 Marks)

c. Explain the concept and significance of dual prices and slack variables in the context of the model used by the company in this scenario. (4 Marks)

d. Calculate the dual prices for constraints identified in this scenario. (10 Marks)

e. Suggest ways in which the management can overcome the capacity constraints identified above during the month and the cost implications. (6 Marks)

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PM – May 2015 – L2 – SB – Q7 – Environmental and Social Performance Management

Discuss the concept of globalisation, its impact on management information systems, and arguments against its influence on management performance

The use of internet has made the entire universe a global village. Managers can comfortably sit in their offices connected to the internet and the world wide web to obtain all necessary information for their business needs.

Required: a. Discuss the concept of globalisation and how management information systems have enhanced effective management performance. (10 Marks)
b. What arguments will you advance against globalisation as it relates to management performance? (5 Marks)

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PM – May 2015 – L2 – SB – Q6 – Costing Systems and Techniques-

Determine the most profitable product mix for Markus Limited, and prepare a profitability statement for the optimal product mix.

Markus Limited manufactures three products and operates a marginal costing system.

The following information has been extracted from the company’s records:

Products X Y Z
Units budgeted to be produced and sold 3,600 6,000 3,400
Selling Price (₦) 120 110 100
Requirement per Unit:
Direct Material (kg) 5 3 4
Direct Labour (Hours) 4 3 2
Direct Labour Hour rate (₦) 4 4 4
Direct Material Cost per Kg (₦) 8 8 8
Variable Overheads (₦) 14 26 16
Fixed Overheads (₦) 20 20 20
Maximum possible sales (units) 8,000 10,000 3,000

All the three products are produced from the same direct material using the same types of machine and labour. Direct labour, which is the key factor, is limited to 37,200 hours.

Required: a. Determine the most profitable product mix. (6 Marks)
b. Prepare a statement of profitability for the product mix. (9 Marks)

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PM – May 2015 – L2 – SB – Q5 – Balanced Scorecard

Evaluate the use of the Balanced Scorecard and analyze investment decisions for Carossi Limited using ROI and RI.

CAROSSI Limited makes quality wooden products such as tables, chairs, benches, and doors. Historically, the company has used mainly financial performance measures to assess the performance of the company as a whole. The company’s Chief Executive Officer has just been informed of the ‘Balanced Scorecard Approach’ and is eager to learn more.

CAROSSI Limited has two Divisions X and Y, each with its own cost and revenue streams. Each Division is managed by a divisional manager who has the power to make all investment decisions within the Division. The cost of capital for both Divisions is 15 percent. Historically, investment decisions have been made by calculating the Return on Investment (ROI) of any opportunities, and presently, the return on investment of each Division is 18 percent.

A recently appointed manager for Division X strongly feels that using Residual Income (RI) to make investment decisions would result in better ‘goal congruence’ throughout the organisation.

Investment Details for Each Division:

Division X Division Y
Capital required for investment (₦m) 88.2 46.0
Revenue generated from investment (₦m) 46.4 28.1
Net profit margin (%) 30 35

The company is seeking to maximise shareholders’ wealth.

Required: a. Describe the Balanced Scorecard Approach to performance measurement. (8 Marks)
b. Determine both the return on investment and residual income of the new investment for each of the two divisions. Comment on these results and take into consideration the manager’s views about residual income. (7 Marks)

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PM – May 2015 – L2 – SB – Q4 – Costing Systems and Techniques

Analyze the pricing policy and budget position for Badegy Limited, considering competitor price changes and cost inflation.

BADEGY Limited is a medium-sized company. The company is in the process of deciding its pricing policy for the next period.

The following information is available from its records:

Previous Period:

  • Revenue: ₦13,000,000
  • Units Sold: 100,000 at ₦130
  • Costs: ₦10,000,000
  • Profit: ₦3,000,000

Current Period:

  • Revenue: ₦13,780,000
  • Units Sold: 106,000 at ₦130
  • Costs: ₦10,774,000
  • Profit: ₦3,006,000

It was discovered that between the previous and current periods, there was a 4% general cost inflation, and it is forecast that costs will rise further by 6% in the next period. As a matter of policy, the company did not increase the selling price in the current period, although competitors raised their prices by 4% to allow for the increased costs.

A survey by a team of management consultants found that the demand for the product is elastic with an estimated price elasticity of demand of 1.5. This means that volume falls by 1.5 times the rate of real price increase. Various options are to be considered by the Board.

Required: a. Show the budgeted position of the company if it maintains the ₦130 selling price for the next period when it is expected that competitors will increase their prices by 6%. (15 Marks)
b. What would the budgeted position be if the company also raises its price by 6%? (5 Marks)

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FM – May 2015 – L2 – SB – Q3 – Cost-Volume-Profit (CVP) Analysis

Evaluate Pakex's investment proposal using Residual Income and ROCE, including alternative proposal analysis for decision-making.

Pakex is a division of an automobile group that has five years remaining on a leased premises in which it sells self-assembled motorcycles. The management is proposing an investment of ₦48 million on immediate improvements to the interior of the premises in order to stimulate sales by creating a more effective selling environment. The following information is available:

(i) The expected increase in revenue following the improvements is ₦40 million per annum. The average contribution to sales ratio is expected to be 40%.

(ii) The cost of capital is 16% and the division has a target Return on Capital Employed of 20% based on the net book value of the investment at the beginning of the year.

(iii) At the end of the five-year period, the premises improvements will have a NIL residual value.

(iv) The management staff turnover at Pakex division is high. The division’s investment decisions and management performance measurement are currently based on the figures for the first year of the proposal.

In addition to the above information, there is an alternative proposal that suggests a forecast of the increase in revenue per annum from the premises improvements as follows:

Year 1 2 3 4 5
Increase in Revenue 56 40 40 24 16

All other factors are expected to remain the same.

Required: a. Prepare a summary of the statement of the management’s investment proposal for years 1 to 5 showing Residual Income and Return on Capital Employed for each year using the straight-line depreciation method. (10 Marks)
b. Comment on the use of the figures from the Statement in (a) above as a decision-making and management performance measure. (4 Marks)
c. Calculate the Residual Income and Return on Capital Employed for year 1 using the alternative proposal. (6 Marks)

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FM – May 2015 – L2 – SB – Q2 – Introduction to Performance Management

Prepare profitability and cash flow statements, and compute liquidity and gearing ratios for Ozoigbondu Nigeria Limited.

Ozoigbondu Nigeria Limited is a company that is into buying and selling of plastic containers. The company is financed by a capital of ₦15 million inclusive of reserves in a mix of 30% and 70% of debt and equity respectively.

The Company has been in trading business for the past six years and has consistently adhered to its corporate policy on sales, purchases, and inventory management.

The company’s policy on sales is to ensure that sales are collected as follows: (i) Cash sales is 40% of the monthly sales. (ii) The balance of the month’s sales is to be collected in the month following sales.

The policy on purchases is in agreement with the supplier’s policy which is to pay for all supplies in the month following. The company’s stock policy is to reserve 30% of the month’s purchases as closing inventory.

The following information is available for the five years 2010 to 2014:

2010 2011 2012 2013 2014
Monthly Sales 3,400,000 3,600,000 4,200,000 4,800,000 7,200,000
Monthly Purchases 2,000,000 2,400,000 2,800,000 3,200,000 4,800,000
Monthly Salaries 350,000 350,000 430,000 430,000 480,000
Monthly Rent 100,000 100,000 100,000 100,000 100,000
Monthly Cash Expenses 200,000 220,000 240,000 280,000 360,000

Additional Information: (i) The company purchased a motor vehicle in July 2013 which was paid for in September 2013. The cost of the motor vehicle was ₦5,000,000.
(ii) Annual depreciation for the motor vehicle is 20%.
(iii) The Cash Balance as at 31st December 2011 was ₦4,000,000.
(iv) The company’s salaries, rent, and expenses were paid in the month they were due.

Required: a. Prepare a Profitability Statement for 2012, 2013, and 2014. (10 Marks)
b. Prepare a Cash Flow Statement for 2012, 2013, and 2014. (7 Marks)
c. Determine and comment on the liquidity ratio (current ratio) for 2014. (2 Marks)
d. Compute the gearing ratio. (1 Mark)

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PM – May 2019 – L2 – Q2 – Divisional Performance Measurement

Discuss the benefits of EVA and calculate it for Tees Nigeria Ltd based on provided financial data.

Peter Drucker opined that “until a business returns a profit that is greater than its cost of capital, it operates at a loss.” Therefore, experts have challenged accounting profit as a good measure of business value increase and proposed economic value added (EVA) as a better measure.

Tees Nigeria Limited has presented the following financial data for the year ended 31 December 2018:

Income Statement 2018:

Item ₦000
Profit before interest and tax 75,000
Interest cost (9,000)
Profit before tax 66,000
Tax at 30% (19,800)
Profit after tax 46,200
Dividends paid (30,000)
Retained profit 16,200

Statement of Financial Position 2018:

Item ₦000
Non-current assets 305,000
Net current assets 190,000
Total assets 495,000
Shareholders’ funds 395,000
Long-term debt 100,000
Capital employed 495,000

Notes:
(i) Capital employed at the beginning of the year was ₦420 million.
(ii) The company had non-capitalised leased assets of ₦24 million.
(iii) The estimated cost of equity was 10%, and the cost of debt was 7%.
(iv) The company’s target capital structure is 60% equity and 40% debt.
(v) Other non-cash expenses were ₦16 million.
(vi) Depreciation is equal to economic depreciation.

Required:
a. Discuss the perceived benefits of using EVA to measure business performance. (10 Marks)
b. Calculate the real economic profit of Tees Nigeria Limited using EVA. (10 Marks)

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PM – May 2019 – L2 – Q1 – Standard Costing and Variance Analysis

Analyze variances, reconcile budgeted and actual profit, and evaluate pricing strategy success for KK Plc.

KK Plc. buys small tablet computers which it customizes for the Nigerian market and then resells to electronics retailers. Although a detailed variance analysis is carried out each month, the CEO John, T, has become concerned that no one has a clear responsibility for taking action in response to this analysis or for using it to carry out an ex-post analysis of the outcome of important decisions.

The following is an extract from last month’s budget:

Model A B C
Selling price/unit (N) 1,000 1,250 1,500
Variable cost/unit (N) 400 500 600
Sales (units) 25,000 40,000 15,000

The budgeted fixed costs were N12,500,000 for the month, which were not dependent on the mix or quantities of products sold. When the budget was being prepared, it was estimated that the total size of the market (including sales by the company and the competitors) would be 400,000 units.

Shortly after the beginning of the month, the marketing director, Okon Nelson, decided that a change of pricing strategy was necessary in response to the recessionary economic conditions. The price of Model A was reduced by 10%, and the prices of Models B and C were each reduced by 20%. The company was partly successful in passing on the impact of these price reductions to its suppliers, and as a consequence, the variable cost per unit for all three models was reduced by 5%. Actual fixed costs were 5% higher than budgeted because of the marketing costs associated with publishing the price reductions.

As a result of the recessionary conditions, the actual total market size was just 200,000 units. The actual quantities sold by the company were as follows:

Actual quantities sold by the company were as follows:

Model Sales (units)
A 14,800
B 29,500
C 11,700

Required:
a. Present a comprehensive analysis of variances, reconciling the budgeted and actual profit for last month in as much detail as possible from the information provided. (25 Marks)
b. Evaluate the financial success (or otherwise) of the decision to change the pricing strategy and assess whether the difference between the budgeted and actual performance was attributable mainly to luck or to factors within the company’s control. (5 Marks)

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PM – Nov 2018 – L2 – Q7 – Performance Measurement Systems

Detailed characteristics of strategic, tactical, and operational information in an organization.

Information within an organisation can be analysed into the following three levels:

  • Strategic information
  • Tactical information
  • Operational information

Required:
Give detailed characteristics of each type of the above information.

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PM – Nov 2018 – L2 – Q6a – Risk Management

Analyze threats due to patent expiration and recommend strategies to maintain profitability for DDD Ltd.

DDD Limited is a relatively small, specialist manufacturer of chemicals used in the pharmaceutical industry. It does not manufacture pharmaceutical products itself but modifies raw materials sourced from large chemical companies using patented processes before selling them to pharmaceutical companies. Several patents are due to expire in the next three years.

The following are some key points regarding the company:

  • DDD’s customers are large pharmaceutical companies under pressure from governments to reduce drug prices.
  • DDD has experienced high profit margins due to the protection provided by its patents.
  • The expiration of these patents poses a threat to DDD’s business, with customers pressuring for lower prices.

Required:
a. Advise the Board of Directors on the possible threats related to the expiration of patents.
(7 Marks)

b. Appraise suitable courses of action DDD might take to maintain its profits in light of the threats identified in part (a).
(8 Marks)

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PM – Nov 2018 – L2 – Q5b – Business Process Reengineering

Discuss six key challenges in developing a management information system for an organization.

Discuss SIX challenges likely to be encountered in the development of an organisation’s Management Information System.

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PM – Nov 2018 – L2 – Q5a – Business Process Reengineering

Discuss different methods for gathering information during the system analysis phase, including their advantages and disadvantages.

During the system analysis phase, the analyst uses different methods to obtain information. You are required to discuss these methods, including their advantages and disadvantages.

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PM – Nov 2018 – L2 – Q4 – Costing Systems and Techniques

Calculates labour costs, profitability, and material cost based on ARR for Julmat Limited’s new product.

Julmat Limited, a manufacturing company, has developed a new product that requires an initial capital investment of N5m. At the end of the product’s life, the capital equipment is expected to have a value of N3m. Julmat Limited requires an Annual Rate of Return (ARR) of 20% on its average investment on products of this type. The new product has an expected life of one year before it will be replaced by a more advanced product.

Production
The new product will be manufactured in batches of 1,000 units using a just-in-time production system.

The first batch is expected to incur a direct labour cost of N100,000, but a 75% learning curve is expected until the cumulative production equals 30 batches.

Thereafter, each batch is expected to incur the same direct labour cost as that of the 30th batch.

The expected direct materials cost for the first batch is N50,000. However, an experience curve is expected to apply to the first 10 batches produced; thereafter, no further savings in material costs per batch are expected.

Other production costs are expected to be N10,000 per batch.

Sales
Sales of the new product are expected as follows for each of the four stages of the product life cycle:

Stage Units Sold Selling Price per Unit (N)
Introduction 10,000 120
Growth 30,000 100
Maturity 60,000 80
Decline 30,000 50

Required:
a. Prepare calculations to show the total direct labour cost of the product for each of the four stages of the product life cycle. (6 Marks)
b. Assuming that there is no experience curve in relation to the product’s direct material cost, prepare a statement that shows the profitability of the new product for each of the four stages of the product life cycle individually and in total for the product’s life. (5 Marks)
c. Assuming that the direct material experience curve applies, calculate the average direct material cost per batch that must be incurred in order for the company to meet its ARR target over the life cycle of the product. (4 Marks)
d. Discuss the concept of life cycle costing and its effect on product pricing strategies at different stages of the product life cycle. Use the Julmat Limited scenario to illustrate your answer. (5 Marks)

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PM – Nov 2018 – L2 – Q3 – Working Capital Management

Prepare cash forecast, profitability, and liquidity ratio for Omegboeji Nigeria Ltd from 2015-2017.

Omegboeji Nigeria Limited is a trading company that specialises in buying and selling of bulk oil. The company is financed by a capital base of N24 million inclusive of reserves in a mix of 30% and 70% of debt and equity respectively. The company has been in the trading business for the past six years and has consistently adhered to its corporate policy on sales, purchases, and inventory management.

The company’s policy on sales is to ensure that sales proceeds are collected as follows:
(i) Cash Sales is 30% of the monthly sales.
(ii) The balance of the month’s sales is to be collected in the month following sales.

The policy on monthly purchases, which is in agreement with the supplier’s policy, is to pay for all supplies in the month following the month of purchase. The general policy of the company is that purchase cost for bulk oil represents 60% of the corresponding annual sales value while its inventory policy is to reserve 30% of the month’s purchases as closing inventory.

The following information is available for the five years 2013 to 2017:

Year Monthly Sales (N’000) Monthly Salaries (N’000) Monthly Rent (N’000) Monthly Expenses (N’000)
2013 12,000 800 400 350
2014 15,000 800 400 370
2015 16,800 960 400 390
2016 18,000 960 400 390
2017 24,000 1,080 400 380

Additional information:
(i) The company will purchase a motor vehicle in July 2016, which will be paid for in two instalments as follows:

  • First payment: 60% of cost in September 2016
  • Balance: To be paid in November 2016
    The cost of the motor vehicle is expected to be N7,500,000.

(ii)Annual depreciation for the motor vehicle will be 20% on a straight-line basis. Monthly expenses include annual depreciation for the motor vehicle.

(iii) The cash balance as of December 31, 2014, was N2,500,000.

(iv) The company’s salaries, rent, and expenses will be paid in the month during which they are due.

Required:
a. Prepare a cash forecast for 2015, 2016, and 2017, showing the closing cash balance at each year-end. (10 Marks)

b. Prepare a forecast profitability statement for 2015, 2016, and 2017. (7 Marks)

c. Determine and comment on the forecast liquidity ratio (current ratio) for 2017. (3 Marks)

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PM – Nov 2018 – L2 – Q2c – Transfer Pricing

Explains two key attributes of a good transfer pricing policy.

Explain TWO attributes of a good transfer pricing policy.

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PM – Nov 2018 – L2 – Q2a and Q2b – Transfer Pricing

Calculate divisional profits and analyze the group impact under different demand scenarios and alternative sourcing options.

X and Y Divisions are two arms of the XY group of companies. X Division manufactures one type of component, which it sells to external customers and also to Y Division.

The following information relates to X Division:

  • Market price per component: N200
  • Variable cost per component: N105
  • Fixed costs: N1,375,000 per period
  • Demand from Y Division: 20,000 components per period
  • Capacity: 35,000 components per period

Y Division assembles another type of product, which it sells to external customers. Each unit of that product requires two of the components manufactured by X Division.

The following information relates to Y Division:

  • Selling price per unit: N800
  • Variable cost per unit:
    • Two components from X: 2 @ transfer price
    • Other variable costs: N250
  • Fixed costs: N900,000 per period
  • Demand: 10,000 units per period
  • Capacity: 10,000 units per period

Group Transfer Pricing Policy:

  • Transfers must be at opportunity cost.
  • Y must buy the components from X.

Required:

a. Calculate the profit for each division if the external demand per period for the components made by X Division is: i. 15,000 components ii. 19,000 components iii. 35,000 components

b. Calculate the financial impact on the Group if Y Division ignored the transfer pricing policy and purchased the 20,000 components it needs from an external supplier for N170 each. Your answer must consider the impact at each of the three levels of demand (15,000, 19,000, and 35,000 components) from external customers for the components manufactured by X Division.
(3 Marks)

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