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ReportHi guys,
As part of our expansion, we have just purchased one of our suppliers.
They will become another division of our company and will continue to sell directly to their existing customer base, some of whom are already customers of ours and we were their largest customer.
We would like to maintain the margin on sales from our old supplier to our company so that we can conduct a historical analysis of sales and also measure the profitability of the division.
We are going to set the new division up as a new responsibility centre within our existing company and all sales to customers from this division will be attributed to the new RC. The problem we have however is that we want to maintain our current price structure, including margins and to do that the cost price for sales made by the new division will be the actual cost price of the goods, whereas the cost price for sales made from our existing branches needs to be the price that we would have purchased the goods for if the new division was still an external supplier.
Are you following me so far??
So we are looking for a way to transfer stocks from the new RC to our existing RC's in an increased cost price for the existing divisions, BUT we are also trying to avoid artificially inflating the value of our inventory.
Here is a very basic example of what currently happens:
| As a separate company | Sales to us | Direct sales |
| Cost price | $10.00 | $10.00 |
| Sell price | $15.00 | $20.00 |
| Margin | 33% | 50% |
| Our current sales | Direct sales | |
| Cost price | $15.00 | |
| Sell price | $20.00 | |
| Margin | 25% |
in the example above, the supplier makes a margin of 33% on sales made to us and a 50% margin on direct sales and we make a margin of 25% on our direct sales.
This is what will happen as standard once they are a division of our company:
| As a division of us | Transfers to us | Direct sales |
| Cost price | $10.00 | $10.00 |
| Sell price | $10.00 | $20.00 |
| Margin | 0% | 50% |
| Our future sales | Direct sales | |
| Cost price | $10.00 | |
| Sell price | $20.00 | |
| Margin | 50% |
in the example above transfers are at cost and therefore do not have a margin so as the biggest customer of our supplier, the profitability of the division will drop markedly compared to their previous performance and our profit will jump from 25% to 50%, which is a huge increase compared to historical performance. When combined the overall profit will be accurate but it will be very difficult to compare current figures to historical figures.
Has anyone come across a requirement similar to this and if so, how did you handle it??
Thanks,
Warren.
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