Fruities Ltd Has Two Divisions,Durian Division and Juice Division

question 13

Multiple Choice

Fruities Ltd has two divisions,Durian Division and Juice Division.Durian Division has an annual capacity of 10 000 units of durian juice concentrate.Juice Division's annual requirement of durian juice concentrate is 8000 units.Fruities Ltd requires that divisions should purchase inputs internally where available,and uses a cost-plus transfer price policy,where transfer price is set at variable cost plus 25 per cent.Therefore,Durian Division always satisfies the demand of the Juice Division first,before selling the remaining durian concentrate to external suppliers at the market price of $10 per unit.The variable cost of one unit of durian juice concentrate at Durian Division is $6.The external demand for Durian Division's durian juice concentrate is 2000 units.What is the difference in the overall profit of Fruities Ltd under the cost-plus transfer price policy and a market-price transfer price policy?

• A) Fruities Ltd's profit is $20 000 lower under the cost-plus transfer pricing approach
• B) Fruities Ltd's profit is $20 000 higher under the cost-plus transfer pricing approach
• C) Fruites Ltd's profit is $25 000 higher under the cost-plus transfer pricing approach
• D) There is no difference under the two policies.

---

Definitions:

Flexibility

The ability to adapt to changes, challenges, or new requirements in an environment or strategy, often seen as a critical component in the success and resilience of organizations and individuals.

Adaptability

The ability of an individual or organization to adjust or change in response to new circumstances.

Profitability

The state or condition of yielding a financial gain or return on investment.

Survival

The ability of an organism, entity, or business to continue to live or exist, especially under difficult or threatening conditions.