Reference no: EM133360118

TT and UU are two divisions at the VV Group. The TT division manufactures batteries which it sells to other divisions and external customers.
The UU division has designed a new product with the name of product B and has asked TT division to supply them with the battery component. Each unit of product B will require one battery component. This battery component will not be sold by TT to external customers. TT division has quoted a transfer price of R585 for each battery.
It is the policy of VV Group to reward managers based on their divisional returns on capital employed.
Details of the monthly production for each division are as follows:
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TT division
Output Battery components will be produced in batches of 1000 units.
Variable cost R195 per battery
Fixed costs R60 000 (these are incurred to produce the battery component)
UU division
Output Product B will be produced in batches of 1000 units
The maximum customer demand is 6000 units.
Variable costs R117 per unit plus the cost of the Battery component.
Fixed costs R75 000 (there are incurred specifically to produce Product B)
The relationship between monthly customer demand and the selling price of product B is shown below:
Demand selling price per unit
1000 units R1 560
2000 units R1 430
3000 units R1 300
4000 units R1 170
5000 units R1 040
6000 units R871
Required:
4.1. Calculate, based on the transfer price of R585 per battery component, the monthly profit that would be earned because of selling product B by:
a) UU division
b) TT division
c) VV Group (10)
4.2. Calculate the maximum monthly profit from the sale of product B for the VV Group. (4)
4.3. Calculate, using the marginal cost of the battery component as the transfer price, the monthly profit that would be earned because of selling product B by:
a) UU division.
b) TT division
c) VV Group. (6)
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QUESTION FOUR [14]
Dell Construction Limited (DCL) took a contract in 2020 for the construction of road. The contract price was R1000 000, and it is estimated that the cost of completion will be R920 000. The company R360 000 representing 90% of work certified. Work not yet certified was R10 000. Expenditure incurred on the contract during 2020 was as follows:
Material R50 000
Material damages R5000
Damaged material sold for R1000
Plant depreciated by 25%

Required:
Prepare the contract account for the year ending 2020 in the books of DCL. Also show all possible figures that can reasonably be credited to the profit and loss account in respect of the contract.