In: Accounting
Garden Company is an integrated multidivisional manufacturing
firm. Two of its divisions, Motor and Assembly, are...
- Garden Company is an integrated multidivisional manufacturing
firm. Two of its divisions, Motor and Assembly, are profit centres
and their division managers have full responsibility for production
and sales (both internal and external). Both the Motor and Assembly
manager are evaluated by top management based on total profit.
Motor is the exclusive producer of a
special component called QS – 40. Since there is no outside
competition for QS-40, the Motor division manager used the results
of a market study to set the price of $550 for each unit. Normal
sales are 21,000 per year. Production capacity is 26,000 per year.
Standard production costs for one unit of QS-40 based on normal
production volume are as follows:
Direct
materials
$175
Direct
labour
75
Variable
overhead
60
Fixed
overhead
100
Total unit production costs
$410.00
Assembly Division produces machinery
for several large customers on a contractual basis. Management have
been approached by a manufacturer of industrial greenhouses to
produce a sprinkler system for greenhouses. QS-40 is a
component of the sprinkler system. Potentially each greenhouse may
need several sprinkler systems. The new customer order size is
15,000 units per year at a price of $ 750 per unit.
The manager of the Assembly Division
calculated the unit costs to produce the special machine as follows
(direct materials does not include QS-40):
Direct
materials
$100
Direct
labour
50
Variable
overhead
35
Fixed
overhead
45
Total unit production costs $230
Required:
- What is the maximum unit transfer price that Assembly would be
willing to pay for QS-40 if the division wishes to accept the
contract for the sprinkler system?
- What is the minimum unit transfer price that Motor division
should be willing to accept for QS-40? Based on a and b will a
transfer occur?
- Assume that Motor Divisions would be able to sell its capacity
of 26,000 units of QS -40 per year if the selling price is reduced
by 10%. Evaluate from the view of top management the quantitative
and qualitative factors of selling internally or reducing price and
selling externally. If none are sold internally then Assembly
division will not be able to make Sprinkler system.
- Assume top management decide to impose a dual transfer pricing
system for QS-40 which would satisfy the Motor and Assembly
managers. Discuss the implications of this
decision.
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