Management accounting | Accounting homework help


CLUK is a producer of sports nutrition drinks and has two divisions, D1 and D2. Division D1 manufactures recyclable plastic containers which it sells to both Division D2 and also external customers. Division D2 makes high protein drinks which it sells to the retail trade in the containers that it purchases from Division D1.

You have been provided with the following budget information for Division D1:




Selling   price to retail customers per 1,000 containers



Variable   costs per container



Fixed Costs   per annum

2.4 million


Net Assets

4.0 million


Production   capacity

40,000,000 containers


Retail   demand for containers

38,000,000 containers


Demand for   containers from Division D2

20,000,000 containers

You have been provided with the following budget information for Division D2:




Selling per   container of protein drink



Variable   costs per drink (excluding container)



Cost per   container (from Division D1)

At transfer price


Fixed Costs



Net assets



Sales   volume of protein drinks in containers


Transfer Pricing Policy

Division D1 is required to satisfy the demand of Division D2 before selling containers externally. The transfer price for a container is full cost plus 20%.

Performance Management Targets

Divisional performance is assessed on Return on Investment (ROI) and Residual Income (RI). Divisional managers are awarded a bonus if they achieve the annual ROI target of 25%. CLUK has a cost of capital of 7%.



(a) Produce a three-page PowerPoint presentation to incorporate the following tasks:

(i) SLIDE 1

Using Excel, produce a profit statement for each division detailing sales and costs, separating external sales and inter-divisional transfers. You are advised to produce this statement in a Excel spreadsheet first and then copy this information into the PowerPoint slide 

(ii) SLIDE 2

Using Excel, calculate the ROI for division D1 and division D2. Copy this information into Slide 2 of the PowerPoint presentation

(iii) SLIDE 3

Provide a brief commentary on the divisionalised profit statements and ROI results shown in slides 1 and 2

(b) The directors of CLUK are planning to expand the operations of the company and together with the divisional managers, have agreed to purchase a new machine that would increase annual production capacity to 50,000,000 cans at Division D1.

The purchase of this machine will increase the net assets of Division D1 by $500,000. Assume that there is no impact on unit variable costs or fixed costs resulting from this purchase. Inter-divisional transfers will be priced at opportunity cost.

You are required to produce a report to the directors critically discussing the issues and implications of the Transfer Pricing Policy on this investment and divisional profits. You should support your answer with suitable analysis and revised profit statements (these should be included as appendices to your report). Your report should be produced in a Word document containing no more than 1,000 words (+/- 10%).

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