Question

Crede Inc. has two divisions. Division A makes and sells student desks. Division B manufactures and sells reading lamps.

Each desk has a reading lamp as one of its components. Division A can purchase reading lamps at a cost of $11 from an outside vendor. Division A needs 9,300 lamps for the coming year.

Division B has the capacity to manufacture 46,700 lamps annually. Sales to outside customers are estimated at 37,400 lamps for the next year. Reading lamps are sold at $11 each. Variable costs are $7 per lamp and include $1 of variable sales costs that are not incurred if lamps are sold internally to Division A. The total amount of fixed costs for Division B is $72,300.

Consider the following independent situations.

(a)

What should be the minimum transfer price accepted by Division B for the 9,300 lamps and the maximum transfer price paid by Division A?

Minimum transfer price accepted by Division B		$  per unit
Maximum transfer price paid by Division A		$  per unit

(b)

Suppose Division B could use the excess capacity to produce and sell externally 13,950 units of a new product at a price of $7 per unit. The variable cost for this new product is $5 per unit. What should be the minimum transfer price accepted by Division B for the 9,300 lamps and the maximum transfer price paid by Division A?

Minimum transfer price accepted by Division B		$  per unit
Maximum transfer price paid by Division A		$  per unit

(c)

If Division A needs 15,500 lamps instead of 9,300 during the next year, what should be the minimum transfer price accepted by Division B and the maximum transfer price paid by Division A? (Round answers to 2 decimal places, e.g. 10.50.)

Minimum transfer price accepted by Division B		$  per unit
Maximum transfer price paid by Division A		$  per unit

Answer 1