GROUP 17 BLOCK

PRESENTATION
C20141840X
ZVIDZAI ASHLEY
1.A(I)
Explain whether Makudo and Tsoko will be able to voluntarily agree on a
transfer price, and whether this situation is in the best interests of
Mhuka Ltd. as a whole. (4 marks)

 If Tsoko purchases 2000 batches at a cost of $30 per batch ( $30 by 2000 =
$60000) rather than keep purchasing at $24 thus total cost of $48000, the
subsidiary makes loss of $12000 on purchases.
 If Makudo sells 2000 of its 12000 units to Tsoka at a transfer price of $24
this reduces overall expected profit for those 2000 batches by $12000.
 For the best of Mhuka limited as a whole, Both subsidiaries should agree
on an average amount which helps them share 50/50 loses for the best of
Mhuka that is ((24+30)/2=$27 ) for the best of Mhuka.
 Therefore Makudo has ($300000+(2000*$27))= $354000) making a loss on
sales of $6000 and Tsoko has (2000*27=54000) making also a loss on
purchases of $6000.
 The two subsidiaries will make an unvoluntarily agreement from a
directive from the director to act in the best interests of Mhuka Ltd.
1.A(II)
If Makudo were to agree to make transfers to Tsoko at the price charged
by the latter’s local supplier, what would be the effect on the profits of
Makudo, Tsoko, and Mhuka Ltd. as a whole? (3 marks)
 Tsoko has no negative effects as this allows to purchase at the same cost
they were purchasing on $24.
 On Makudo we first need to calculate the profits for all circumstances
involved:

If Makudo sells If Makudo Effect to

all batches @ agree $24 Mhuka of the
$30 transfer P to agreement as
Tsoko a whole
Sales $360000 $348000 -$12000
V. Costs ($204000) ($204000) ----------
Fixed Costs ($60000) ($60000) ----------

Profit $96000 $84000 -$12000

1.A(II) CONTINUED
 Makudo Ltd makes a loss of $12000 on agreement to transfer at $24.
 Mhuka ltd profit might be decreased by this agreement if the two
subsidiaries are to agree to the price desired by Tsoko.
1.B
Now assume that, because of limited market demand, Makudo can sell
only 8500 batches per month to unconnected third-party customers. In
these circumstances:
I. Discuss whether Makudo and Tsoko will be able to voluntarily agree
on a transfer price. (4 marks)
 It’s unlikely that Makudo and Tsoko will be able to voluntarily agree on a
transfer price.
 Makudo is only able to sell 8500 batches per month due to limited market
demand and its unlikely that Tsoko would be willing to pay a higher price
for paper than the price they are getting from a third party.
 Since a local supplier is charging $24 per batch, Tsoko Ltd would not see
that in their best interest to agree to pay a higher fee.
 However due to limited demand this means Makudo has limited capacity
to the control of 3500 batches. So since they are same company
subsidiaries Makudo can will have no option but to negotiate to with
Tsoko to a price since Makudo has limited capacity and can even agree to
the same price charged by local supplier.
1B(II)
If Tsoko’s local supplier were to reduce its price to $20 per batch,
should Makudo agree to reduce the transfer price to the same figure?
Consider this question from the viewpoints of Tsoko, Makudo, and
Mhuka Ltd. as a whole. (3 marks)
 Makudo would not agree to reduce the price to $20 because despite
having limited capacity
 He might agree to reduce the price but not to $20 as this would
affect Mhuka Ltd.'s overall profit as a whole.
 For the best of Mhuka Ltd they will agree on a price which will keep
Tsoko profits higher and also not making Makudo a big loss to make
sure this transfer benefits Mhuka Ltd as a whole.
1B(III)
Following a refusal by Tsoko to agree to transfers at the $20 price, The
Director is considering the possibility of issuing a directive that Tsoko
must purchase its monthly paper requirements from Makudo at $30
transfer price. Advise The Director as to the merits (or otherwise) of
this proposal.(5marks/)
 Makudo is able to maintain level of profitability as targeted in the first
place thus selling all 12000 batches per month at $30 achieving targeted
$360000, targeted sales.
 However to Tsoko Ltd, This has a negative impact on Tsoko’s financial
position.
 Changing the amount they have been paying from $48000 (24*2000) to
$60000 (30*2000), from a big perspective of the subsidiary will weaken
their financial position reduce profits and even weakens demand since
Tsoko Ltd might have to increase price of their output of production.
 I advice the director to first calculate the financial risks around this
directive not only to Tsoko but to Mhuka Ltd as a whole not looking at
profit only but demand of the outputs of the production at Tsoko Ltd how
this affects the company.