Question

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

Capacity in units		140,000
Selling price to outside customers on the intermediate market		$ 19
Variable costs per unit		$ 13
Fixed costs per unit (based on capacity)		$   10

  

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 14,000 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 25,000 special high-pressure valves per year. The Valve Division's variable costs to manufacture and ship the special valve would be $11 per unit. To produce these special valves, the Valve Division would have to reduce its production and sales of regular valves from 140,000 units per year to 90,000 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.)

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Answer 1

1) Since Valve division has idle capacity to make the transfer the minimum transfer Price will be Variable cost per unit and maximum transfer price which pump division is paying to outside supplier i.e. $13 to $18

2) Since Valve division has no idle capacity to make the transfer the minimum transfer Price will be Variable cost + Contribution Lost per unit i.e $19 ($13 + $6). No Range of Transfer.

3)  Since Valve division has no idle capacity to make the transfer the minimum transfer Price will be Variable cost + Contribution Lost per unit i.e $17 ($11 + $6) because the variable cost has declined by $2 due to saving of selling costs and maximum transfer price which pump division is paying to outside supplier. Range Of Transfer will be $17 to $18.

4) Calculation of lowest Acceptable Transfer Price :-

Variable Cost    $275000(25000*11)

Add :- Contribution Lost $300000(50000*6)

Total Cost $575000

Transfer Price per unit = $23 per unit ($575000/25000 units)

*Fixed Cost per unit is irrelevant cost for determination of transfer price.