Question Tag: Internal Transactions

7. Adebel Nigeria Limited manufactures motorcycles, operating through two divisions: the assembling division (Division A) and the engine division (Division E). Division E supplies engines to both Division A and external customers. The company’s policy requires that Division E prioritize internal sales to Division A over external sales, while Division A is mandated to purchase exclusively from Division E. However, this policy, along with the transfer price set by Division E, is under review.

   Division Details:

   • Division A anticipates a need for 45,000 engines in the coming year, with an external supplier price of N80,000 per engine.
   • Division E can produce up to 70,000 engines per year, with the following budgeted details:
     • Budgeted sales volume: 70,000 units
     • External selling price: N85,000 per engine
     • Variable cost per unit for external sales: N77,000
     • Variable cost per unit for internal sales to Division A: N3,000 less due to distribution and packaging savings.
     • Maximum external demand: 35,000 units per year.

Requirements:

a. Recommend the transfer price(s) for internal sales, considering the conditions. (5 marks)

b. Using calculations, advise the number of engines Division E should supply to Division A to maximize group profits, assuming a flexible policy. (5 marks)

c. Discuss two performance measures suitable for evaluating divisional performance of autonomous divisions operating as investment centers. (5 marks)