CHINHOYI UNIVERSITY OF TECHNOLOGY

RACHEL JIMU C20142166L ASHLEY T CHIRO C20142650X

NIGEL JONGA C20142224J ENOCK T TICHAYANA C20142138L

TADIWANASHE DANDIRA C20142331P
PANASHE R CHITSATSE C20142123N

DENNIS T. NYADONGO C20141160N GRAFTON T CHIREBVU C20142027A

ELIJAH MUDZIMU C20142642O TANYA MUGOMA C20143143I
LECTURER: DR. J. NDHLOVU
TITLE: GROUP 18 PRESENTATION
COURSE: PERFOMANCE MANAGEMENT
FACULTY: SCHOOL OF ENTREPRENEURSHIP & BUSINESS SCIENCES
PROGRAMME: BACHELOR OF SCIENCE HONOURS DEGREE IN ACCOUNTANCY
 QUESTION 18
a)Variable Cost from external Source
- The variable cost per jacket would decrease to $44+$28=$72
Contribution margin per jacket with internal Source
=Selling price per jacket – variable cost per jacket
=$80 -$28
=$52
Contribution margin per jacket with external Source
=Selling price per jacket – variable cost per jacket
=$80 - $72
=$8

If Division B were to source its lengths of wool externally ,the contribution margin per jacket would
decrease significantly . This would lead to a decrease in Makondo `s wool monthly profits. Therefore , it is
preferable for Division B to continue sourcing its lengths of wool from Division A.
b) Optimal Transfer price
= Contribution margin per jacket with external – contribution margin per jacket with external
=$52- $8
=$44 per length of cotton wool

-Therefore setting the transfer price at $44 ensures that Division B contribution margin per
jacket remains the same as when sourcing internally .This motivates both Division Managers to
act in a way that aligns with Makondo`s goal of maximizing overall profitability.
c) Division A
Revenue from the sale of 1 500 lengths of wool
= 1 500 lengths *$50 per length
=$ 75 000

Incremental Transportation cost

=1 500 lengths *$10 per length
=$15 000

Net Revenue
=$75 000- $15 000
=$60 000
Net Profit
Revenue from the sale of 1 500jackets –cost of 1 500 lengths of wool
=$80 per jacket * 1 500 jackets - $ 66 000
=$54 000

Therefore Division A would report a net profit of $ 60 000 while Division B would report a net profit of
$54 000.
d)Division A `s performance is based on the revenue generated from selling lengths of wool to the external
garment manufacturer , considering the incremental transportation cost. Division B`s performance is based
on the net profit from the sale of jackets , taking into account the cost of lengths of wool purchased from
Division A.

Division B , is still generating a net profit of $54 000 which contributes to Makondo`s overall
profitability. Closing down Division B would result in the loss of this profit contribution.

However , it is important to consider other factors such as long term viability , market demand and
potential strategic advantages before making a decision to close down a division.
Question 2

a) Transfer price proposed by the Chemicals Division

Marginal cost per ton =$90

Fixed Cost per month =$288 000
Total cost per month =$288 000+ ($90* 6 000)=$828 000
Full cost per ton =$828 000/6 000
=$138
Since the Detergents Division has indicated that this price would be acceptable, it is likely that both divisions
will act in a manner that is in the best interests of Nhongo Ltd as a whole .By using the full cost per ton as the
transfer price ,the Chemicals Division will be able to cover its costs and make a profit , while the detergents
division will be able to purchase the chemicals at a reasonable price . This will help to ensure that both
divisions are able to operate efficiently and contribute to the overall profitability of Nhongo`s Ltd.
a) The board of directors of Nhongo Ltd should intervene to order the divisions to make the transfer at a
price that is fair and reasonable to both parties involved .This may involve setting a transfer price that is
somewhere between the Chemicals Division's minimum acceptable price of $145 per ton and the
Detergents Division`s maximum acceptable price of $95 per ton. The board of directors may also need to
consider other factors such as the overall profitability of Nhongo Ltd and the impact of the transfer price
on the company`s external customers.
a) If the Detergents Division requires an additional 500 tons per month

Marginal cost per ton =$90

Fixed Cost per month =$288 000
Total cost per month =$288 000+ ($90* 6 000)= $828 000
Full cost per ton =$828 000/6 500
=$127.38

Marginal costs to Chemicals Division of supplying a ton to Detergents Division

=$90 -$3
=$87

Appropriate transfer price per ton

=$127.38 + $87
=$141.38
By setting the transfer price at $141 per ton the chemicals Division will be able to cover its costs and
make a profit while the Detergents Division will be able to purchase the chemical at a reasonable price.
This will help to ensure that both divisions are able to operate efficiently and contribute to the overall
profitability of Nhongo Ltd.