Question 2: (16 marks) (B1, CI) The Fruity Bakers specialize in making delicious cakes. Their...
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Question 2: (16 marks) (B1, CI) The Fruity Bakers specialize in making delicious cakes. Their trademark fruit cake is made in Division X (the supplying division) and sold to external customers for them to decorate, or it can be enjoyed plain. It is also transferred to Division Y (the receiving division) where it is iced and decorated to be sold as a luxury wedding cake. Fruity Bakers are currently trying to decide what the optimum price to sell the cakes from Division X to Y should be in order to motivate the managers of both divisions. The following data shows the costs incurred by Division X to make a fruit cake and by Division Y to ice and decorate the wedding cake: S/unit Division X Variable costs 22 Fixed overhead 9 31 Division Y 33 Variable costs Fixed overhead 8 41 . Plain fruit cakes can be sold and purchased externally for $35. Wedding cakes can be sold for $80. . Instructions: 1. Should the company make the fruit cakes internally or buy them in? (2 marks) 2. What non-financial factors should also be taken into consideration? (2 marks) 3. What would be the implication of using the following transfer pricing policies? (12 marks) 1 a Variable cost plus 30% . Variable cost only c. The extemal market price d Full cost plus 5%
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