CD is a producer of soft drinks. The company has two divisions: Division C and Division D.
Division C manufactures metal cans that are sold to Division D and also to external
customers. Division D produces soft drinks and sells them to external customers in the cans that it obtains from Division C.
CD is a relatively new company. Its objective is to grow internationally and challenge the existing global soft drinks producers. CD aims to build its brand based on the distinct taste of its soft drinks.
Division C annual budget information $
Market selling price per 1,000 cans 130
Variable costs per can 0.04
Fixed costs 2,400,000
Net assets 4,000,000
Production capacity 40,000,000 cans
External demand for cans 38,000,000 cans
Demand from Division D 20,000,000 cans
Division D annual budget information $
Selling price per canned soft drink 0.50
Variable costs per canned soft drink (excluding the can) 0.15
Cost of a can (from Division C) At transfer price
Fixed costs 1,750,000
Net assets 12,650,000
Sales volume 20,000,000 canned soft drinks
Transfer Pricing Policy
Division C is required to satisfy the demand of Division D before selling cans externally.
The transfer price for a can is full cost plus 20%
(a) Produce a profit statement for each division detailing sales and costs,
showing external sales and inter-divisional transfers separately where
(b)Calculate both the ROI and the RI for Division C and Division D.
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