(a) Profit statement for current position:

Division B Division A
P’000 P’000 P’000
Sales revenue:
External sales (150,000 x P180/200,000 x P15) 27,000 3,000
30,000
Internal transferred sales (150,000 x P13) 1,950
––––––– –––––– –––––––
Total revenue 27,000 4,950 30,000
––––––– –––––– –––––––
Variable costs:
External material costs (150*45) 6,750 (350*3) 1,050 7,800
Internal transferred costs (150*13) 1,950
Labour costs (150*35)5,250 (350*4) 1,400 6,650
Other costs of external sales (200*1)200 200
––––––– –––––– –––––––
Total variable costs 13,950 2,650 14,650
––––––– –––––– –––––––
Contribution 15000 350 15,350
Less fixed costs 5,469 2,200 7,669
––––––– –––––– –––––––
Profit 9531 (1850) 7,681
––––––– –––––– –––––––

Scenario 1: Transfer Price =P20

Division A:
 Revenue from selling 10,000 units to Division B =P20 * 10,000 =P200,000
 Materials cost =P8 * 10,000 =P80,000
 Other variable costs =P2 * 10,000 =P20,000
 Annual fixed costs =P60,000
 Profit = Revenue - (Materials cost + Other variable costs + Annual fixed costs)
=P200,000 - ($80,000 +P20,000 +P60,000) =P200,000 -P160,000 =P40,000
Division B:
 Revenue from selling 10,000 units in the market =P35 * 10,000 =P350,000
 Materials cost =P2 * 10,000 =P20,000
 Other variable costs =P3 * 10,000 =P30,000
 Annual fixed costs =P30,000
  Profit = Revenue - (Materials cost + Other variable costs + Annual fixed costs)
=P350,000 - ($20,000 +P30,000 +P30,000) =P350,000 -P80,000 =P270,000
Overall Organization:
 Total profit = Profit of Division A + Profit of Division B =P40,000 +P270,000
=P310,000
Scenario 2: Transfer Price =P25
Division A:
 Revenue from selling 10,000 units to Division B =P25 * 10,000 =P250,000
 Materials cost =P8 * 10,000 =P80,000
 Other variable costs =P2 * 10,000 =P20,000
 Annual fixed costs =P60,000
 Profit = Revenue - (Materials cost + Other variable costs + Annual fixed costs)
=P250,000 - ($80,000 +P20,000 +P60,000) =P250,000 -P160,000 =P90,000
Division B:
 Revenue from selling 10,000 units in the market =P35 * 10,000 =P350,000
 Materials cost =P2 * 10,000 =P20,000
 Other variable costs =P3 * 10,000 =P30,000
 Annual fixed costs =P30,000
 Profit = Revenue - (Materials cost + Other variable costs + Annual fixed costs)
=P350,000 - ($20,000 +P30,000 +P30,000) =P350,000 -P80,000 =P270,000
Overall Organization:
 Total profit = Profit of Division A + Profit of Division B =P90,000 +P270,000
=P360,000
So, the budgeted annual profits for each profit center and the organization as a whole are as
follows:
Scenario 1: Transfer Price =P20
 Division A:P40,000
 Division B:P270,000
 Overall Organization:P310,000

Scenario 2: Transfer Price =P25

 Division A:P90,000
 Division B:P270,000
 Overall Organization:P360,000