2 The Information Technology pision (IT) of the RJ Business Consulting Group provides consulting services to its

clients as well as to other pisions within the group. Consultants always work in teams of two on every consulting

day. Each consulting day is charged to external clients at ￡750 which represents cost plus 150% profit mark up. The

total cost per consulting day has been estimated as being 80% variable and 20% fixed.

The director of the Human Resources (HR) pision of RJ Business Consulting Group has requested the services of

two teams of consultants from the IT pision on five days per week for a period of 48 weeks, and has suggested that

she meets with the director of the IT pision in order to negotiate a transfer price. The director of the IT pision has

responded by stating that he is aware of the limitations of using negotiated transfer prices and intends to charge the

HR pision ￡750 per consulting day.

The IT pision always uses ‘state of the art’ video-conferencing equipment on all internal consultations which would

reduce the variable costs by ￡50 per consulting day. Note: this equipment can only be used when providing internal

consultations.

Required:

(a) Calculate and discuss the transfer prices per consulting day at which the IT pision should provide

consulting services to the HR pision in order to ensure that the profit of the RJ Business Consulting Group

is maximised in each of the following situations:

(i) Every pair of consultants in the IT pision is 100% utilised during the required 48-week period in

providing consulting services to external clients, i.e. there is no spare capacity.

(ii) There is one team of consultants who, being free from other commitments, would be available to

undertake the provision of services to the HR pision during the required 48-week period. All other

teams of consultants would be 100% utilised in providing consulting services to external clients.

(iii) A major client has offered to pay the IT pision ￡264,000 for the services of two teams of consultants

during the required 48-week period.

(12 marks)

(a) (i) The transfer price of ￡750 proposed by the IT pision is based on cost plus 150% from which it can be deduced thatthe total cost of a consulting day is (100/250) x ￡750 = ￡300. This comprises ￡240 (80%) variable cost and ￡60(20%) fixed cost. In t