Reference no: EM132978529

Question - Chantelle Ltd is a well-established company which produces wooden kitchen furniture sets in its two divisions A and B. Division A produces the items of furniture and then transfers them to Division B, who varnish them and sell them to a well-known national retailer for £600 per set of a table and 4 chairs. For the last number of years, the managers of the 2 divisions have communicated well and have been happy with the transfer pricing arrangements, under which the transfer price was set at £290 per set of furniture. However, the manager of Division A has recently left Bangor Ltd., for a competitor and the newly appointed manager of division A is not happy with the transfer price of £290 and believes it should be £390 per unit. He is arguing that the overall profit for the company will also be increased by doing this however, Sam, the manager of Division B disputes this and is arguing that the transfer price should remain the same. Sam is also arguing that the profits of the 2 divisions are not the only measurement of the managers performance. As the management accountant you have been asked to prepare the information for the next divisional meeting.

The budgeted data for the month is:

Division A Division B

Units transferred/sold 6,000 6,000

Annual fixed costs £27,500 £50,000

Allocated Head Office Costs £17,500 £25,000

Material costs per unit £120 £40

Labour costs per unit £75 £35

Other variable costs per unit £25 £20

Required - Prepare profit statements for each of the divisions and also for the company as a whole, if the transfer price from Division A to B is:

(i) £290 per unit.

(ii) £390 per unit.