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Internal Supplies by Kamp Motors

In:

Submitted By peterkent
Words 1360
Pages 6
Case Study: Internal Supplies by Kamp Motors

CASE:
Involves two companies namely:
1. Vecu ▪ A French company that produces cars, Lorries, buses and agricultural machinery.
2. Kamp ▪ One of Vecu’s subsidiaries ▪ An International leader in the field of engine production ▪ Develops racing car engines for many years

Kamp produces four main types of car engines
Type 1 – conventional type / sells externally
Type 2, 3 & 4 – high tech types / sell internally

Financial Data on Kamp Motors 2001 (x €1 million)
Sales = 361
External Cost = 204
Staff = 98
Depreciation = 20

An important order in 2002 (Develop Type 2A engine)
Quantity = 5000 engines
Variable cost per unit = 2500
Full cost per unit = 4000
Development cost = 200
Profit = 750 (if sells engines externally)

Problem No. 1

What transfer price should Kamp insist on, in your opinion, if it were to supply the type 2a engine to the MB division now and in the future? Please give arguments for your proposal. You should at least consider the principle ‘minimum transfer price = variable cost per unit + opportunity costs for the supplier’ and the guidelines Vecu has for transfer prices. Please draw attention to the interests of Kamp Motors as well as those of Vecu as a whole. Taking into consideration Vecu’s transfer price policy, what do you think of Guy Mercier’s attitude?

Given:
Quantity = 5000 engines (for Type 2A)
Full Cost per unit = €4000 (for Type 2A engine if calculated in usual way)
Development Cost = €200 (For developing the Type 2A engine)
Variable Cost per unit = €2500
Opportunity cost = €750 (Profit if sell engines externally)

Calculation:
Minimum Transfer Price = Variable cost per unit + Opportunity costs = €2500 + €750 = €3250

+ 200 (Development Cost)

Proposed Transfer Price = €3450 - Now

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