Question

ActFast Ltd is a company that manufactures and sells a wide range of laptops to both domestic and international market. It has two divisions, i.e. Assembly Division and Battery Division. Battery Division sells batteries to both Assembly Division and to other laptop manufacturers. Assembly Division could also purchase batteries from other suppliers.

The following data is available for both divisions:

Assembly Division
Selling price for each laptop, including battery	$1,800
Costs per laptop:
Battery from battery Division	$130
Other materials	$450
Variable overheads	$350
Annual production and sales of laptops	150,000 units
Maximum annual external sales for laptops	180,000 units
Battery Division
Transfer price per battery sold to Assembly Division	$130
Selling price per battery to external customers	$140
Variable costs per battery (see Note*)	$70
Current maximum production capacity	350,000 units
Maximum potential external sales	220,000 units

(Note*) Battery Division saves a variable overhead of $5 per battery if sold internally.

Additional Information:

1. Currently, ActFast’s purchasing policy requires Assembly Division to purchase all the batteries needed from Battery Division at a price determined by the Head Office, which is $130. However, Battery Division has refused to sell to Assembly Division any quantity more than the current level of batteries it supplies to Assembly Division, i.e. 150,000 units. This purchasing policy is not favourable to both managers as they cannot maximize their profit. The manager of Assembly Division has an external battery supplier who can supply batteries at $128.
2. The marketing director is planning to launch a new model of laptop, LS100, in six-month’s time. It is near completion in its design stage. The purpose of LS100 is to compete with a close competitor. The selling price of the competing laptop is $2,500 and the marketing director believes the launching price of LS100 could be in the range of $2,200 to $2,400. During the recent progress report, the laptop design engineers stated that the new laptop needs to incorporate some new features as this is necessary in order to stay ahead of competition. However, this would mean additional costs to be incurred.

Required:

1. Discuss how the existing purchasing policy restricts both managers in maximizing their net profit and how the new purchasing policy will change this. You need to support your discussion with the calculation of an acceptable transfer price range for both divisions under the new purchasing policy. (400 words) (Note: 2 marks for calculation and 8 marks for discussion)

Answer 1

Environmental Management Accounting(EMA) is the process of collection and analysis of the information relating to the environmental cost for internal decision making. EMA is an attempt to integrate best management accounting thinking with best environmental management practice

Since the environmental costs are generally hidden in general overheads of the company, it becomes difficult for management to identify opportunities to cut environmental costs but nonetheless it is crucial for them to do so to preserve natural resources getting scarcer.

EMA helps in Identification, allocation and Controlling environmental costs.

Benefits form EMA are listed down below.

1.Waste Management: Mass balance approach may be used to determine how much material is wastedd in production, whereby the weight of materials bought is compared to the product yield.

Given that

Assembly Division purchases various parts for the laptops from local suppliers. These parts are usually packed in sealed plastic bags and disposed as normal rubbish. Using EMA helps in identifying cost incurred in purchase and disposal of plastic bags and as the plastic is not Bio-degradable, EMA brings to Management notice that how much tonnes of Plastic is used and ways to reduce such waste and search for alternative packing material which is eco friendly.

  Battery Division uses a lot of chemical in manufacturing laptop batteries. Some of these chemicals are treated in its own waste treatment plant before disposal while others are sold to chemical recycling company. Using EMA helps in calculating Inhouse treatment cost and market cost for disposing and choosing the best alternative between them to further action to expand the inhouse waste treatment or sell to recycling company considering cost and other factors.

2.Energy : Environmental Management accounts may help to identify inefficiencies and wasteful practices and therefore opportunities for cost savings.

Given that Battery Division is consuming high volume of electricity in its manufacturing processes. EMA helps in identifying inefficiencies in pracitces and discover ways to reduce electricity wastage and any other alternatives which are cost efficient.

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