Reference no: EM132782815

Lancelot Corporation has two divisions. Manila Division and Pasig Division. Manila Division produces product Cream with the following data:

Unit sales price P120

Production cost per unit:

Materials 10

Direct labor 15

Variable overhead 20

Fixed overhead (based on normal

capacity of 40,000 units) 10

Marketing and general expenses:

Variable 6

Fixed 4

Maximum capacity 50,000 units

Units sold to outside customers 40,000 units

• Pasig Division, a newly established division, needs 5,000 units of Product Cream. An outside supplier which produces Cream with comparable quality as that of Manila Division has quoted Pasig Division to supply the 5,000 units for P70. Pasig Division would sell product Cream to its customers for P120 after incurring marketing and packaging costs of P20 per unit. Manila Division would not incur any variable marketing expense if the 5,000 units are sold to Pasig Division.
• Pasig Division would use P200,000 incremental average assets for the production and sale of 5,000 units of product Cream. Manila Division uses an average of P2,000,000 in assets to produce Cream and generate an income of P1,200,000 from its customers.

Required:

Question 1. For the 5,000 units to be ordered by Pasig Division, determine the ROI for Manila Division, Pasig Division, and Lancelot Corporation, assuming:

a. An inter-divisional transfer price of P45.

b. An inter-divisional transfer price of P70.

c. Pasig Division buy from an outside supplier of P70.

Question 2. For Lancelot Corporation, how much is the net advantage (disadvantage) if Pasig Division buys the 5,000 units from Manila Division rather from an outside supplier?

Question 3. What would be the minimum transfer price between Manila and Pasig Division?

Question 4. What would be the minimum transfer price assuming Manila Division is already operating at maximum capacity?