Bangor Ltd is a well-established company which produces wooden garden 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 £400 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, which was set at £200 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 £200 and believes it should be £250 per unit.
He is arguing that the overall profit for the company will also be increased by doing this however, Frankie, the manager of Division B disputes this and is arguing that the transfer price will remain the same.
Frankie 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 | 5,000 | 5,000 |
| Annual fixed costs | £35,000 | £40,000 |
| Allocated Head Office Costs | £15,000 | £20,000 |
| Material costs per unit | £100 | £50 |
| Labour costs per unit | £50 | £25 |
| Other variable costs per unit | £20 | £15 |
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) £200 per unit
(ii) £250 per unit
If the divisions have investments of £1million each and Bangor Ltd requires a cost of capital of 10%, calculate the Return on Investment (ROI) and Residual Income (RI) for each of the divisions.
.Non-financial performance indicators (NFPI’s) are becoming more popular when measuring performance. Give 4 examples of a NFPI that could be used by Bangor Ltd.
