Question

Fyodor Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers. The company's Machine Division has asked the Parts Division to provide it with 5,600 special parts each year. The special parts would require $19 per unit in variable production costs. The Machine Division has a bid from an outside supplier for the special parts at $28.50 per unit. In order to have time and space to produce the special part, the Parts Division would have to cut back production of another part-the QR4 that it presently is producing. The QR4 sells for $36 per unit, and requires $18 per unit in variable production costs. Packaging and shipping costs of the QR4 are $2 per unit. Packaging and shipping costs for the new special part would be only $0.50 per unit. The Parts Division is now producing and selling 28,000 units of the QR4 each year. Production and sales of the QR4 would drop by 5% if the new special part is produced for the Machine Division. Required: a. What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 5,600 special parts per year from the Parts Division to the Machine Division? (Round your final answers to 2 decimal places.)

Answer 1

Special Parts
Requiremet	5600	units
Variable production cost	19
Supply price for special parts	28.5
packing and shipping cost	0.5
QR4
Sales	28000	Units
Sale Price	36
Variable production cost	18
Packaging and shipping cost	2
Reduction in sales due to special part	5%
Reduction in sales	=28000*0.05		1400
Profit Margin	=36-918=2)		16
Loss in profit margin due to reduction	= 1400 * 16		22400
Machine Division
Profit margin on special part	=28.50-(19+0.50)		9
Gain on profit margin	=5600*9		50400
Net Differential	= Gain on sale of special parts by Machine division - Loss due to reduction in sale of QR4
	= 50400-22400		28000
In order for both divisions to be profitable the transfer price shoule be between 22401 to 27999