Page 117 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes Option 2:
Again, contribution on production and sale of assemblies:
Sale value of assembly per unit ` 2000
Less Variable cost of assemblies at Div. B ` 1500

Contribution per unit ` 500
Hence, from the total company’s point of view, sales of assemblies to outside market is more
profitable by ` 200/- (` 500 – ` 300)
1. If sales to the intermediate outside are 800 units, the company should go for such sales
rather than manufacturing complete cycle. 200 units can be transferred to division A,
because the company as a whole will earn profit though Division A will earn loss if the
transfer is made at long run average market price basis. The position will be as follows:
Division A Division B Total company
Sales to outside:
Complete cycle 200 units @ ` 3000 ` 600,000 ` 600,000
Assemblies 800 units @ ` 2000 16,00,000 1600,000
Transfer to Division A 200  2000 4,00,000- -
6,00,000 20,00,000 2200,000

Division A Division B Total company
Variable cost:
Div. A 200 units@ ` 1200 per unit 2,40,000 240,000
Div. B 1000 units@ 1500 per unit 15,00,000 15,00,000
Transfer from Div. B 400,000
640,000 1500,000 1740,000
Contribution (-)40,000 5,00,000 460,000
2. With transfer price of ` 2000, Division A is losing ` 3000 – ` 2000 – ` 1200 per unit = ` 200
per unit
Whereas Division B is having contribution of ` 2000 – 1500 = ` 500 on its external sales of
800 units and 200 units transfer to Division A for complete cycle. The company for complete
cycle is earning ` 300 per unit.
The contribution of ` 300 per unit should be shared between Div. A and Div. B. The transfer
price will be variable cost of ` 1200 p. u. plus something i.e., ` 167/- (on the ratio of
variable cost 1200 : 1500) = ` 1667 to get motivated.
3. Since the sales of subassemblies are contributing more per unit (` 500 against 300) than
complete cycle, it should sell 1000 units as subassemblies in the outside market.

Example: A transportation equipment manufacturer is heavily decentralized. Each
division head has full authority on all decisions regarding sales to internal or external customers.
Division ‘P’ has always acquired a certain equipment component from Division ‘S’. However,
when informed that Division ‘S’ was increasing its unit price to ` 220, Division P’s management
decided to purchase the component from outside suppliers at a price of ` 200/-. Total annual
capacity of Division ‘S’ is 2000 units per annum.

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