Material prices influence Research Paper Example | Topics and Well Written Essays - 3000 words

Material prices influence - Research Paper Example Question 2 a) Monthly profit position for each of L Ltd and M Ltd if the sales of L Ltd : i. at their present level Particulars M L Selling prices 9 20 Sales in litres 750000 250000 Sales in drums 30000 10000 Total sales 270000 200000 Raw materials - 9 Other cost 5 3 Total VC for a month 150000 120000 Fixed costs 60000 40000 total cost 210000 160000 Profit 60000 40000 Assumptions 1. 1 drum = 25 litres 2. Current production capacity of L ltd if 1000 kilolitres p.m 3. Current production level of L ltd is 75% 4. Production and sales are same, no stock in hand (ii) at their higher potential level indicated by the market research, subject to a cut in price of 20%. Particulars M L Selling prices 9 16 Sales in litres 750000 450000 Sales in drums 30000 18000 Total sales 270000 288000 Raw materials - 9 Other cost 5 3 Total VC for a month 150000 216000 Fixed costs 60000 40000 Total cost 210000 256000 Profit 60000 32000 b) i. Difficulties when the market prices are used as transfer price produces underthe conditions outlined in (a) (ii) above. When the market prices are used as the transfer prices, it is disadvantageous for L ltd. This is because, it is planning to reduce its selling price by 20%, thereby increasing its sales by 80%. If this reduction in selling prices happens, then the profits enjoyed by L Ltd decreases even though there is an increase in sales by 80 %. The raw material prices are same for L ltd. There is no decrease in the raw materials which is purchased from M Ltd. As the production increases for L ltd, the raw material consumption also increases and which should bring down the raw materials cost down. The raw materials cost charged by M ltd, is based on the market price and hence, it does not benefit L Ltd. (ii) Factors to be...This is because, it is planning to reduce its selling price by 20%, thereby increasing its sales by 80%. If this reduction in selling prices happens, then the profits enjoyed by L Ltd decreases even though there is an increase in sales by 80 %. The raw material prices are same for L ltd. There is no decrease in the raw materials which is purchased from M Ltd. As the production increases for L ltd, the raw material consumption also increases and which should bring down the raw materials cost down. The raw materials cost charged by M ltd, is based on the market price and hence, it does not benefit L Ltd. As an accountant, I would consider the dual approach to fix the transfer prices. M ltd is currently selling for two parties, one L Ltd and other external parties. For L Ltd, the transfer price can be based on full cost approach and for the external customers, it can be based on the market prices. The actual cost of production should be estimated, including the research and development cost and other costs that are traceable to the division. A full cost absorption approach can be adopted to overcome these kind of problems.