Case Studies1

CASE STUDIES Subject- Management Control Systems Topic- Fixing of interdepartmental Transfer price COMPILED BY: Professor Sameer Kulkarni CS-1 M/s. Sam Engineering is comprised with two separate manufacturing divisions, ‘A’ and ‘B’. Both are operating as a separate profit centre. Each division manager has full authority to decide on sale of division’s out put to outsiders and to other divisions.

et

Division ‘B’ is purchasing its annual requirement of 1000 units of a component manufactured by division, ‘A’. Division manager ‘A’ took a decision of increasing the selling price of the component to Rs.150/unit.

Se cr

This increase in price has motivated divisional manager’ ‘B’ to explore the possibilities /opportunities for out sourcing the same component from third party suppliers. Division ’B’ get the proposal from such an out side supplier @ Rs.135/unit. Divisional manager ‘A’ refused to decline the proposed hike in selling price; following justification was furnished in support of the price hike: Division ’A’ variable Cost in manufacturing each component is Rs: 120/Division ’A’ fixed Cost in manufacturing each component is Rs: 20/In case if division ‘B’ stops the proposed purchase from division ’A’ the same facilities can be exploited for some other activities resulting in a cash flow of Rs.18,000/-

To p

• • •

The top management wants to assess the situation under given conditions, and would like to find out the cost justification of both the division managers’ Find out the positional benefits under various situations available for both the divisions.

PDF created with pdfFactory Pro trial version www.pdffactory.com

CS-2 Two divisions, Component and Assembly of Videocon Television Co are working under separate heads. The Component divisional produces three types of products ‘A’, ‘B’, ‘C’, normally these products are sold to both the out side customers and to the assembly division of the company. The assembly division uses products ‘A’, ‘B’, ‘C’ in assembly of products ‘P’, ‘Q’,’ R’, respectively. In recent weeks the supply of products A, B and C has tightened to such an extent the divisional operation of the assembly unit is going down significantly. With the results the component division has been told to sell all its products to assembly division. Following are the financial details about these products:

Product A Rs.10 3 7 Rs.50,000

Product B Rs.10 6 4 Rs.1,00,000

Product C Rs.15 5 10 Rs.75,000

et

Particulars Transfer Price Variable Mfg Cost Contribution/unit Fixed Cost (total)

Se cr

The component division has a monthly capacity of 50,000 units. The processing constraints are such that capacity production can be obtained only by producing at least 10,000 units of each product. The remaining capacity can be used to produce 20,000 units of any combination of the three products. The component division can not exceed the capacity more than 50,000 units. Other financial data is as follows: Product P Rs.28

Product Q Rs.30

Product R Rs.30

10 5

10 5

15 8

13 Rs.1,00,000

15 Rs.1,00,000

7 Rs.2,00,000

To p

Particulars Selling Price Variable Cost: Inside Purchase Other Variable Costs Contribution per unit Fixed Cost (Total)

The assembly division has sufficient capacity to produce about 40% more than its present production. The market condition is so that all the produced of assembly division can be sold in the market. • • •

If, you were the divisional manager of the component division, what way you had planned the products to maximize the amount of profit? If, you were the divisional manager of the final assembly division, which product you might have purchased from your component division? What production pattern optimizes total profit of the company?

PDF created with pdfFactory Pro trial version www.pdffactory.com