Reference no: EM132611741
Energise Namibia Ltd ("EN") is a beverages manufacturing company based in Windhoek. One of their best-selling product is the traditional 500ml caffeine energy drink called the EN1. The company operates two divisions, the energy drink division ("ED") and the bottled water division ("BW").
The manufacture of EN1 requires purified water which the ED division is currently buying from the BW division. BW also sells its purified water as bottled water to the external market.
The following information relates to the ED division:
ED division N$
Selling price for EN1 bottle 18
Costs per EN1 bottle:
Purified water from BW division 4.00
Other ingredients externally sourced 4.50
Direct labour cost 3.50
Fixed overheads per year 546 000
Units of EN1 produced and sold per year N$150 000
Maximum demand in units for EN1 per year N$180 000
The information relating to the BW division is also presented as follows:
BW division N$
Selling price per 500ml bottle to ED division 4.00
Selling price per 500ml bottle to external customers 7.00
Costs per 500ml bottle : Materials 1.50
Labour costs 2.00
Fixed overheads per year 20,000
Annual capacity (500ml bottles) 350,000
External demand for 500ml bottles 200,000
The BW division incurs a variable distribution cost of N$1 for each 500ml bottle that it sells outside. The Head Office currently enforces that the ED division buys its purified water from the BW division.
However, at the present moment, the BW division is no longer willing to increase their supply of purified water to the ED division and have vowed to maintain the current level of supply.
The divisional head of the ED division presented her argument that if the Head Office could allow her to source purified water externally, she is able to get it at exactly the price that the BW division is selling to them. Given these squabbles, the Head Office of EN held a meeting with both divisional heads and allowed the ED division to purchase purified water from outside as long as the EN profit will be maximised.
For simplicity, you may assume that the ED division buys purified water from the BW division in the same package designed for external sales.
Question 1: Calculate the profit for each division and for EN as a whole in columnar format (table format) using the current transfer pricing policy. Your answer should clearly show the revenue and costs figures for internal and external sales where relevant.
Question 2: Based on the new policy, and assuming it is the best for EN, calculate the number of 500ml bottles that BW should sell externally and the number of 500ml bottles that ED should buy internally. Provide detailed justification of how you arrived at the transfer price.
Question 3: Using the old transfer pricing policy, what minimum price should the BW charge for the extra units required by the ED division if the ED division wants to meet their maximum demand for the EN1? Provide detailed justification of how you arrived at the transfer price.