Question

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

Labour costs per unit £50 £25

Required:

a. 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

b. 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.

c. .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.

Answer 1

Example of Non-financial performance indicators

Employee satisfaction and engagement: There are certain factors like learning, growth, promotions, compensation package, incentives, recognition which has a very high impact on the performance of the employees. All these are stimuli to peformance and encourages employees to perform more. A motivated staff with these perks will increase efficiency to a different level.Bangor Ltd can offer these to manager of division B in irder to agree him to cotinue working on current transfer price of $250.

Technology: Rapid change in technology along with rapid digitisation has a great impact on the performance of the organisation.Bangor Ltd can incoporate more latest technologies to reduce cost and icrease profit.

Competitive advantage: Organisation should foces on developing competitive advantage which make them better than others.Bangor Ltd should try to develop competitive advantage in Division B so that it can sell its product at the rate higher than current rate to earn higher profit.

Customer Satisfaction: Organisation should focus on developing goods as per the needs of the customer, keepig the defect percantage to minimum and provide a good after sales service.Bangor Ltd should focus on customer satisfaction in oredr to mincrease their volume of sales.