Question

In: Accounting

Collyer Products Inc. has a Valve Division that manufactures and sells a standard valve as follows:...

Collyer Products Inc. has a Valve Division that manufactures and sells a standard valve as follows:
  Capacity in units 260,000
  Selling price to outside customers on the intermediate market $ 19
  Variable costs per unit $ 11
  Fixed costs per unit (based on capacity) $   8

  

The company has a Pump Division that could use this valve in the manufacture of one of its pumps. The Pump Division is currently purchasing 23,000 valves per year from an overseas supplier at a cost of $18 per valve.

Required:
1.

Assume that the Valve Division has ample idle capacity to handle all of the Pump Division's needs. What is the acceptable range, if any, for the transfer price between the two divisions?

2.

Assume that the Valve Division is selling all that it can produce to outside customers on the intermediate market. What is the acceptable range, if any, for the transfer price between the two divisions?

3.

Assume again that the Valve Division is selling all that it can produce to outside customers on the intermediate market. Also assume that $2 in variable expenses can be avoided on transfers within the company, due to reduced selling costs. What is the acceptable range, if any, for the transfer price between the two divisions?

4.

Assume the Pump Division needs 30,000 special high-pressure valves per year. The Valve Division's variable costs to manufacture and ship the special valve would be $10 per unit. To produce these special valves, the Valve Division would have to reduce its production and sales of regular valves from 260,000 units per year to 200,000 units per year. As far as the Valve Division is concerned, what is the lowest acceptable transfer price? (Round your answer to 2 decimal places.)

Solutions

Expert Solution

Answer :

(1) Since Valve division has spare capacity   to handle all of the Pump Division's needs so Valve division should not cut their outside customer's sales.

Minimum trasfer price from the View point of Valve division = variable cost per unit

= $ 11

Maximum trasfer point from View point of   Pump Division = Purchase price from Outside

= $ 18

acceptable range of transefer price between two division = $ 11 to $ 18

(2) In this scenario There is  no spare capacity in  Valve Division so valve division has to cut his outside customer sales to transfer in pump division.

Minimum trasfer price from the View point of Valve division = variable cost per unit + opportunity cost ...ie contribution lost per unit

= $ 11 + ( $ 19- $ 11)

= $ 19

Maximum trasfer point from View point of   Pump Division = Purchase price from Outside

= $ 18

In this scenario transfer will not take place since Valve division will accept minimum $ 19 for transfer and Pump division can paid maximum $ 18 .

So There is no  acceptable range for transfer.

(3)

Minimum trasfer price from the View point of Valve division = variable cost per unit + opportunity cost ...ie contribution lost per unit

= $ 9 + ( $ 19 - $ 11)

= $ 17

Maximum trasfer point from View point of   Pump Division = Purchase price from Outside

= $ 18

acceptable range of transefer price between two division = $ 17 to $ 18

(4)

In this scenario There is  no spare capacity in  Valve Division so valve division has to cut his outside customer sales to transfer in pump division.

lowest acceptable transfer price from  Valve Division's View point

= ( variable cost + opportunity cost ) / number of component

= (30000* $ 10 + $ 480000 ) / 30000

= $ 780000 / 30000

= $ 26 per valve

Working note -1

Opportunity cost for transfer

= Contribution lost on 60000 unit ( 260000 unit - 200000unit )

= ( $ 19 - $ 11 ) * 60000 unit

= $ 480000


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