Reference no: EM132552511

Dolby Ltd has 2 divisions, Division A and Division B. Division A manufactures a specialised electronic component which is supplied to both Division B and to external customers. The variable cost of producing the component is as follows: Direct materials are ?20/unit, Direct labour is ?40/unit, Variable overhead is ?4/unit.

• Division A has the capacity to manufacture 50,000 components monthly without incurring any increase in fixed costs. The maximum external demand for the component is 30,000 units monthly, and Division A sells this quantity externally at £100 per unit. It also sells the component to Division B at the same selling price based on its exact requirements.

• Division B uses two of these components to produce product P, which it sells at £900 per unit externally. At this selling price, monthly demand is 7,000 units. The variable costs of producing product P are as follows:Direct materials are ?300/unit, Components transferred from A are ?200/unit,Direct labour is ?100/unit, Variable overhead is ?50/unit.

• An analysis of demand for product P indicates that for every £10 increase in price, demand would fall by 400 units and for every reduction of £10 in price, demand would increase by 400 units.

Required

Question (a) Calculate the selling price per unit of product P that would maximise the profits generated by the product for Division B.

Question (b) Calculate, based on the selling price you calculated in part (a) above, the monthly contribution that product P would generate for:

i. Dolby Ltd as a whole

ii. Division A

iii. Division B

Question (c) Dolby Ltd has now reviewed its transfer pricing policy and has decided that all transfer prices should be set to lead to optimal decision-making for the company. If the transfer price for the component is changed to reflect this new policy, calculate the selling price per unit of product P that would maximise the profits earned by Dolby Ltd as a whole.