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elasticity of demand

josh
June 19, 2015 0 Comment

VT Ltd is one of several subsidiaries in the GP group of companies. It manufactures electronic control units and sells them both on the open market and to fellow subsidiaries.

Recent market research has produced the following ?gures regarding the elasticity of demand of its TX9 controller:

Selling price    £6        £7        £8        £9        £10

Demand    30,000        25,000        21,000        16,000        13,000

The standard cost for the TX9 is as follows:

£

Direct labour        0.20 hours @ £6/h        1.20

Direct materials:     1 multi-switch @ £2.50        2.50

1 microchip @ £0.50        0.50

Other components        0.20

Overhead        0.1 machine hours @ £4/mh    0.40

Total cost                        4.80

Overheads are 90% ?xed and 10% variable.

The multi-switches and microchips are supplied by fellow subsidiaries SGN Ltd and MLF Ltd respectively. All the other components are sourced outside the GP group. Cost and pricing data for these twocomponents are as follows:

SGN Ltd         MLF Ltd

Unit costs            Multi-switch         Microchip

Direct labour            0.45            0.20

Direct materials            1.15            0.05

Overhead            0.40            0.10

Full cost            2.00            0.35

Internal transfer price        2.50            0.50

External market price        3.50            0.80

SGN is operating at full capacity and has a backlog of orders to ful?ll. MLF is short of orders and, if more are not received soon, it may have to make some redundancies.

Tasks:

1 Based on the market research data, which price–volume combination will maximize the total contribution made by the TX9 controller for VT Ltd? (10 marks)

2 Assuming the proportion of ?xed and variable overheads is the same for all GP’s subsidiaries, determine the ideal transfer prices which will maximize pro?ts for the GP group as a whole. (7 marks)

3 Based on your answers to task 2, determine the price–volume combination to maximize the total contribution to VT Ltd.  (8 marks)

4 Discuss the alternative ways that transfer prices can be calculated and comment brie?y on the fact that ‘ideal’ transfer prices are not being used within the GP group. (10 marks)

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