Question

Sheridan Corporation manufactures car stereos. It is a division of Bonita Motors, which manufactures vehicles. Sheridan sells car stereos to Bonita, as well as to other vehicle manufacturers and retail stores. The following information is available for Sheridan's standard unit: variable cost per unit $41, fixed cost per unit $19, and selling price to outside customer $79. Bonita currently purchases a standard unit from an outside supplier for $73. Because of quality concerns and to ensure a reliable supply, the top management of Bonita has ordered Sheridan to provide 183,000 units per year at a transfer price of $39 per unit. Sheridan is already operating at full capacity. Sheridan can avoid $3 per unit of variable selling costs by selling the unit internally.

a) What is the minimum transfer price that Sheridan should accept?

b) What is the potential loss to the corporation as a whole resulting from this forced transfer?

Answer 1

Explanation:

Selling price to outside customers = $79

Variable cost per unit avoidable = $3 per unit

Minimum transfer price that High Sound should accept = Selling price to outside customers - Variable cost per unit avoidable = $79 - $3 = $76

The minimum transfer price is $76

2)

Compute the lost contribution per unit using the equation as follows:

What is the potential loss to the corporation as a whole resulting from this forced transfer?
Bonita currently purchases a standard unit from an outside supplier for $73.
Selling price of Benson to outside customer	$                 79.00
Less: Unit Purchase cost of Borna if purchase from outside market	$                 73.00
Net loss per unit before any saving in Variable selling costs	$ 6.00
Less: Benefits of Saving in Variable selling costs	$ 3.00
Net loss per unit	$ 3.00
Multiply: Number of unit order per year	183,000
Potential Loss	$ 549,000

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