Question

Paige Inc. has a division that makes paint and another division that constructs houses. The paint...


Paige Inc. has a division that makes paint and another division that constructs houses. The paint division incurs the following costs for one litre of paint:

Direct materials R1.10
Direct labour R1.45
Variable overhead R0.90
Fixed overhead R1.15
Total R4.60

The Paint Division can make 1 000 000 litres per year, and is operating at capacity. The Construction Division currently buys paint from an outside supplier for R5.20 per litre (the same price that the Paint Division receives).

Required:

2.1 Calculate the maximum transfer price per litre of paint. This price is set by which of the two divisions? (2)

2.2 Calculate the minimum transfer price per litre of paint. This price is set by which if the two divisions? (2)


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