Performance Management March/June 2018 Sample Answers - Section C - 31 Portable Garage Co

Sep 14, 2026

Performance Management March/June 2018 sample answers for Section C, focusing on internal transfer pricing and profit planning. The document analyzes Portable Garage Co by constructing contribution and profit figures for Divisions A, B, and PGC Co, then evaluates optimal internal vs external sales decisions using incremental contribution and opportunity cost logic. It also solves The Alka Hotel questions on breakeven occupancy, margin of safety, Q1 operating impact, project C/S ratios, viability under capacity limits, and how fixed and variable cost changes shift breakeven and expected profit.

LanguageEnglish

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Section C

31 Portable Garage Co

32 The Alka Hotel

Performance Management March/June 2018 Sample Marking Scheme

Answers Fundamentals Level – Skills Module, Paper F5 Performance Management March/June 2018 Sample Answers Section C 31 Portable Garage Co (a) Profit statement for current position: Sales revenue: External sales (150,000 x $180/200,000 x $15) Internal transferred sales (150,000 x $13) Total revenue Variable costs: External material costs Internal transferred costs Labour costs Other costs of external sales Total variable costs Contribution Less fixed costs Profit Division B $’000 27,000 | 27,000 | | --- | | 6,750
1,950
5,250 | | 13,950 | | 13,050
5,460 | | 7,590 | Division A $’000 3,000 1,950 | 4,950 | | --- | | 1,050
1,400
200 | | 2,650 | | 2,300
2,200 | | 100 | PGC Co $’000 30,000 | 30,000 | | --- | | 7,800
6,650
200 | | 14,650 | | 15,350
7,660 | | 7,690 | (b) If Division B can buy adaptors from outside the group at $13 per unit, then the optimum position is for Division A to sell as many adaptors as possible to external customers at $15 each and then sell the remainder to Division B at a price to be agreed between them. This would mean that Division A continues to sell Division B 150,000 adaptors but Division B then buys the remaining 30,000 adaptors from an external supplier. This is because the contribution per unit for Division A’s external sales is $7 ($15 – $3 – $4 – $1) . This means that for every external sale it loses, it forfeits $7 for the group. However, the incremental cost for the group of Division B buying adaptors from outside the group is only $6 ($13 external cost less the $7 cost of making them in-house) . So, it makes sense for Division A to satisfy its external sales first before selling internally. (c) In order for Division A to supply Division B with 180,000 adaptors, it would have to reduce its external sales from 200,000 units to 170,000 . This is because it only has enough spare capacity to supply Division B with 150,000 units at present after it has supplied adaptors to its external customers. The minimum transfer price in situations where there is no spare capacity is marginal cost plus opportunity cost. In this case, contribution is lost by not selling 30,000 units to the external customers. As the marginal cost for Division A’s internal sales is $7 ($4 + $3) and the contribution per unit for external sales is $7 per unit ($15 – $3 – $4 – $1), the transfer price for the additional 30,000 units would need to be $14. 32 The Alka Hotel (a) Breakeven point (in occupied room nights) = Fixed cost/contribution per room $600,000/($180 – $60) = 5,000 occupied room nights Margin of safety = (Budgeted room occupancy – breakeven room occupancy)/budgeted room occupancy Total rooms available per annum: 365 days x 25 rooms = 9,125 rooms Budgeted occupancy level: 9,125 x 70% = 6,387·5 rooms Margin of safety: (6,387·5 – 5,000)/6,387·5 = 21·72% (b) Profit or loss for Q1 $ Contribution (900 rooms x $120) Fixed costs (($600,000/12) x 3) Loss 108,000 (150,000) (42,000) The Alka Hotel should not close in Q1 . The fixed costs will still be incurred and closure would result in lost contribution of $108,000 . This in turn would result in a decrease in annual profits of $108,000 . In addition, the hotel could lose customers at other times of the year, particularly their regular business customers, who may perceive the hotel as being unreliable. (c) Contribution/sales ratio of Project 1 $ Sales value of two room nights (2 x $67·50) 135 Sales value of a pair of theatre tickets 100 235 Variable cost of two room nights (2 x $60) (120) Variable cost of a pair of theatre tickets (95) Contribution 20 C/S ratio (20/235) 8·51% Breakeven point in revenue ($20,000/0·0851) $235,000 Alternatively: Contribution per theatre package sold $20 Breakeven point in theatre packages ($20,000/$20) 1,000 Breakeven point in revenue (1,000 x $235) $235,000 The unit contribution per theatre package

FAQs

How is the profit statement for Portable Garage Co’s divisions structured in the sample answers?

The document presents sales revenue (external and internal transferred), separates variable costs (external materials, internal transferred costs, labour, other external costs), then derives contribution and subtracts fixed costs to reach profit for each division.

What transfer pricing logic is applied when Division B can buy adaptors externally?

The sample compares group incremental cost for Division B buying externally against the contribution forfeited when Division A sells fewer units externally. It concludes that Division A should satisfy external customers first before making internal sales, because the external sale contribution loss exceeds the incremental external cost for the group.

How does The Alka Hotel determine breakeven occupancy and assess Q1 closure?

Breakeven occupancy is calculated as fixed cost divided by contribution per room nights. Q1 closure is rejected because fixed costs still incur, and closing would eliminate contribution that otherwise supports annual profit, also risking customer loss and perceived unreliability.

Sep 14, 2026

Uploaded by Sophia Brooks