University of the South Pacific
Faculty of Business and Economics
School of Accounting and Finance
AF201 - Managerial Accounting
Weighting:The total mark for this assignment is 50 and is worth 5% of your total assessment.
Due date:Monday 22nd October, at 2.00 PM sharp in 092-001 Lecture Hall.ALL ASSIGNMENTS HANDED IN AFTER THIS TIME WILL BE REGARDED AS LATE ASSIGNMENTS.
Instructions:1. Your assignment MUST be word processed. Hand written assignments will NOT be accepted.
2. Ensure that your name, ID No., tutor's name and tutorial day and time are stated clearly on the cover page, which can be downloaded from AF201 moodle page.
3. A penalty of 10% will be deducted each day or part thereof that the assignment is late.
4. Plagiarized assignment will be awarded a Zero (0) mark.
Nashmen Manufacturing Corporation produces lawn mowers, snowblowers, and tillers. The company has six divisions, each set up as investment centers. Managers of the divisions are evaluated and rewarded in the basis of return on investment and EVA. Company policy dictates that internal transfers must take place whenever possible and that the transfer price will be full cost plus 10 percent. Ken Booth, vice president of operations, is reevaluating the company’s current internal transfer policy in light of a recent memo received from Dana Lemmons, manager of the Parts Division. The memo follows:
|<img src="file:///C:%5CUsers%5CS11075%7E1%5CAppData%5CLocal%5CTemp%5Cmsohtmlclip1%5C01%5Cclip_image001.gif" alt="Text box: memorandum to: ken booth, vice president of operations from: dana lemmons, manager of parts division subject: transfer pricing policy ken, i must register serious concern about our current transfer pricing policy of full cost plus 10 percent. first, i believe this policy creates a significant understatement of my division’s roi. second, it creates a disincentive for my division to decrease our costs of manufacturing. for example, consider our production of part 34 (small carburetors). currently, we are capable of producing 300,000 of these units each year. of these 300,000 carburetors, the first 200,000 are transferred to the small motor division at a price of $16.50 per unit, and the remaining 100,000 are sold to external customers at $20 each. i know that we can sell every carburetor we make to external customers. by forcing us to transfer internally, we are losing income and showing a much smaller roi than we could otherwise. but the problem is even greater. my engineers have created a new design that will allow us to decrease our fixed manufacturing costs per carburetors by $5 per unit. however, if we implement this design, our transfer price will drop to $11, and the revenues we receive from internal sales will drop significantly. all the savings and more are transferred to the buying division. in my opinion, all these problems can be resolved by allowing each divisional manager to set transfer prices and allowing each of us to buy or sell our products as we see fit. ">|
After reading the memo, Ken gathered the following production information.
Manufacturing cost per carburetor:
Direct materials$ 6.00
Manufacturing cost of small motor:
Total cost$ 60.40
Production and sales of small motor:
1. Assume that the Parts Division implements the new design change. Assume also that the internal demand for the carburetors remains constant. Compute the change in profits for the firm as a whole from this decision. Now compute the change in profits for the Parts Division and the Small Motor Division. Was Dana’s concern valid? Were all the benefits of the improved design captured by the Small Motor Division?(15 marks)
2. Refer to Requirement 1. Now assume that the reduced cost of the carburetor increases the internal demand from 200,000 to 300,000 units. Evaluate the impact on firmwide profits and on each division’s profits. If Dana anticipated this effect, do you think she would implement the cost-reducing design?(20 marks)
3. Refer to the original data. Ken Booth wants to know the effect of decentralizing the internal pricing decisions. Assuming that the Small Motor Division can buy carburetors of equal quality for $20 from outside suppliers, provide Dana with a complete assessment of the effect. In your assessment, include the change in firmwide and divisional profits. Also comment on the incentives that Dana would have for implementing the cost-reducing design.(15 marks)
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