1. Extra question: (same as sem 6 under lec 5)
Time’s Up ltd operates two divisions, Clock and Board and these divisions each
make a single standardised product. Clock makes Bedside Alarm Clocks (BC)
and Board makes general circuit boards for battery clocks (CB). Every clock (BC)
needs one circuit board (CB). Normally circuit boards are purchased from Board
but they may be purchased from an outside supplier at a price of £200 per box.
Board also sells its circuit boards on the open market to external customers. Data
relating to the two products and divisions are provided below:
Board Clock
CBs Bedside clocks
Per box of Per box of
500 CBs 500 clocks
(£) (£)
Selling price per unit 200 350
Variable costs per unit
Direct materials 60 40
Transfer from division LED - 200
Direct Labour 25 20
Variable overhead 50 40
Divisional fixed overhead per annum 2,000,000 1,000,000
Investment in Division 20,000,000 15,000,000
In addition to its sales to Clock, Board has annual external sales at current sales
prices of 70,000 boxes of circuit boards. Clock’s sales are 40,000 boxes of clocks.
The current capacity of Board is 150,000 boxes per annum and the capacity of Clock
is 65,000 boxes per annum.
Clock is not achieving its target rate of return on assets and the Managing Director
blames this on the transfer price his division pays to Board. At the current transfer
price, the manager believes his division has no option but to charge £350 for each
box of clocks. However, if the price could be reduced, then, for each £15 price
reduction, an extra 10,000 boxes could be sold. The Managing Director of Board
claims that the market price for circuit boards should be the basis of transfers of
circuit boards to Clock.
At present, sales of circuit boards to the outside market are limited to 70,000 boxes
by Board’s distribution capability. An increase in fixed costs of £300,000 per annum
could increase sales of circuit boards to the outside market by 10,000 boxes per
annum.
Required:
a) Calculate the return on investment currently achieved by each division and
by Time’s Up ltd as a whole.
b) For Time’s Up ltd as a whole, analyse the data and determine the
maximum profit and return on investment that could be made by Time’s Up
ltd.
,→ → ANSWER:
Board (A) Clock (B) Company
Selling price per Prov (table) Prov (table)
box (GBP)
Variable cost per
box:
Direct materials Prov (table) Prov (table)
Transfer from Prov (table)
division LED
Direct Labour Prov (table) Prov (table)
Variable Overhead Prov (table) Prov (table)
Contribution per = selling price per box – total variable
box of 500 units cost per box
Volume (boxes per = ‘’capacity of A’’ – Prov (‘’B’s sales’’)
annum) ‘’B’s sales’’
Contribution per = contribution per box above * volume
annum (GBP) above
Divisional fixed Prov (table) Prov (table)
overhead per
annum
Profit per annum = contribution per annum above – = SUM <-
(GBP) divisional fixed overhead above
Investment in Prov (table) Prov (table) = SUM <-
division
Return on = (profit per annum / investment in division) *100
investment
B/
For the company as a whole, variable costs ( = all variable costs of A and B
excluding the transfer from division LED = £135 + £100 ) = £235 per unit.
(for each £15 price reduction, an extra 10,000 boxes could be sold)
Price Contribution Volume Contribution
per unit (£) per unit (£) per year (units) per year (£)
350 (‘’no option 40,000 (‘’B’s 4,600,000
but to charge__) 115 (=350-235) sales’’ prov. intext) (=volume*contri)
335 (= 350 -15) 100 (=335-235) 50,000 (=40+10) 5,000,000
320 (= 335 – 15) 85 (=320-235) 60,000 (=50+10) 5,100,000
305 (= 320 – 15) 70 (=305-235) 70,000 (=60+10) 4,900,000
290 (= 304 – 15) 55 (=290-235) 80,000 (=70+10) 4,400,000
(generate table until volume per year reach B’s capacity)
(CHOOSE THE ONE WITH MOST CONTRIBUTION PER YEAR)
, This suggests that the company could increase contribution by £5,100,000 (from the
chosen highlighted line) - £4,600,000 (from the first line) = £5,000,000 if the price of
a box of B were reduced to £320 (from the chosen highlighted line).
However, A could increase its sales of A by 10,000 boxes if fixed costs were
increased by £300,000 (repeat info in text prov.). 10,000 boxes would generate an
extra (contribution per box of A cal. in a x 10,000) = £650,000 contribution making a
net gain of (£650,000 - £300,000 fixed costs gain) = £350,000.
Combining the two analyses the company could maximise contribution by spending
the extra £300,000 (‘’fixed costs increase’’) in A and increasing sales of A to (‘’A’s
sales’’ + 10,000) = 80,000.
(repeat the highlighted line in the above table) 60,000 boxes could be sold to B and
converted into B selling at £320 per box and generating £5,100,000 contribution for
the company.
Board (A) Clock (B) Company
80,000 (just 60,000 (just
Volume analysed) analysed)
85
65 (from (highlighted
Contribution per unit table in a) line in table)
= volume * contribution per
Total contribution unit = SUM <-
= divisional
fixed = divisional
overhead in fixed
table in a + overhead in
Fixed costs increase table in a = SUM <-
Profit = total contribution – fixed costs
Investment in Division Table in a Table in a Table in a
Return on investment = (profit/ investment in division)*100
Time’s Up ltd operates two divisions, Clock and Board and these divisions each
make a single standardised product. Clock makes Bedside Alarm Clocks (BC)
and Board makes general circuit boards for battery clocks (CB). Every clock (BC)
needs one circuit board (CB). Normally circuit boards are purchased from Board
but they may be purchased from an outside supplier at a price of £200 per box.
Board also sells its circuit boards on the open market to external customers. Data
relating to the two products and divisions are provided below:
Board Clock
CBs Bedside clocks
Per box of Per box of
500 CBs 500 clocks
(£) (£)
Selling price per unit 200 350
Variable costs per unit
Direct materials 60 40
Transfer from division LED - 200
Direct Labour 25 20
Variable overhead 50 40
Divisional fixed overhead per annum 2,000,000 1,000,000
Investment in Division 20,000,000 15,000,000
In addition to its sales to Clock, Board has annual external sales at current sales
prices of 70,000 boxes of circuit boards. Clock’s sales are 40,000 boxes of clocks.
The current capacity of Board is 150,000 boxes per annum and the capacity of Clock
is 65,000 boxes per annum.
Clock is not achieving its target rate of return on assets and the Managing Director
blames this on the transfer price his division pays to Board. At the current transfer
price, the manager believes his division has no option but to charge £350 for each
box of clocks. However, if the price could be reduced, then, for each £15 price
reduction, an extra 10,000 boxes could be sold. The Managing Director of Board
claims that the market price for circuit boards should be the basis of transfers of
circuit boards to Clock.
At present, sales of circuit boards to the outside market are limited to 70,000 boxes
by Board’s distribution capability. An increase in fixed costs of £300,000 per annum
could increase sales of circuit boards to the outside market by 10,000 boxes per
annum.
Required:
a) Calculate the return on investment currently achieved by each division and
by Time’s Up ltd as a whole.
b) For Time’s Up ltd as a whole, analyse the data and determine the
maximum profit and return on investment that could be made by Time’s Up
ltd.
,→ → ANSWER:
Board (A) Clock (B) Company
Selling price per Prov (table) Prov (table)
box (GBP)
Variable cost per
box:
Direct materials Prov (table) Prov (table)
Transfer from Prov (table)
division LED
Direct Labour Prov (table) Prov (table)
Variable Overhead Prov (table) Prov (table)
Contribution per = selling price per box – total variable
box of 500 units cost per box
Volume (boxes per = ‘’capacity of A’’ – Prov (‘’B’s sales’’)
annum) ‘’B’s sales’’
Contribution per = contribution per box above * volume
annum (GBP) above
Divisional fixed Prov (table) Prov (table)
overhead per
annum
Profit per annum = contribution per annum above – = SUM <-
(GBP) divisional fixed overhead above
Investment in Prov (table) Prov (table) = SUM <-
division
Return on = (profit per annum / investment in division) *100
investment
B/
For the company as a whole, variable costs ( = all variable costs of A and B
excluding the transfer from division LED = £135 + £100 ) = £235 per unit.
(for each £15 price reduction, an extra 10,000 boxes could be sold)
Price Contribution Volume Contribution
per unit (£) per unit (£) per year (units) per year (£)
350 (‘’no option 40,000 (‘’B’s 4,600,000
but to charge__) 115 (=350-235) sales’’ prov. intext) (=volume*contri)
335 (= 350 -15) 100 (=335-235) 50,000 (=40+10) 5,000,000
320 (= 335 – 15) 85 (=320-235) 60,000 (=50+10) 5,100,000
305 (= 320 – 15) 70 (=305-235) 70,000 (=60+10) 4,900,000
290 (= 304 – 15) 55 (=290-235) 80,000 (=70+10) 4,400,000
(generate table until volume per year reach B’s capacity)
(CHOOSE THE ONE WITH MOST CONTRIBUTION PER YEAR)
, This suggests that the company could increase contribution by £5,100,000 (from the
chosen highlighted line) - £4,600,000 (from the first line) = £5,000,000 if the price of
a box of B were reduced to £320 (from the chosen highlighted line).
However, A could increase its sales of A by 10,000 boxes if fixed costs were
increased by £300,000 (repeat info in text prov.). 10,000 boxes would generate an
extra (contribution per box of A cal. in a x 10,000) = £650,000 contribution making a
net gain of (£650,000 - £300,000 fixed costs gain) = £350,000.
Combining the two analyses the company could maximise contribution by spending
the extra £300,000 (‘’fixed costs increase’’) in A and increasing sales of A to (‘’A’s
sales’’ + 10,000) = 80,000.
(repeat the highlighted line in the above table) 60,000 boxes could be sold to B and
converted into B selling at £320 per box and generating £5,100,000 contribution for
the company.
Board (A) Clock (B) Company
80,000 (just 60,000 (just
Volume analysed) analysed)
85
65 (from (highlighted
Contribution per unit table in a) line in table)
= volume * contribution per
Total contribution unit = SUM <-
= divisional
fixed = divisional
overhead in fixed
table in a + overhead in
Fixed costs increase table in a = SUM <-
Profit = total contribution – fixed costs
Investment in Division Table in a Table in a Table in a
Return on investment = (profit/ investment in division)*100
