Question

Textbook Corp. is a textbook publishing corporation that has contracts with several different authors. It also operates a printing operation called FinePrint Ltd. Both companies operate as separate profit centers. FinePrint Ltd prints books written by Textbook Corp.’s authors as well as books written by outside authors. FinePrint Ltd charges customers $0.04 per page and a typical textbook requires 600 pages of print.

An editor from Textbook Corp. approached the FinePrint Ltd operation manager offering to pay $0.024 per page for 5,000 copies of a 600-page textbook.
Outside printers are currently charging $0.03 per page. FinePrint’s variable cost per page is $0.02.

Instructions

1. Calculate the appropriate transfer price per page, and show your full workings. Indicate whether the printing should be done internally by FinePrint Ltd under each of the following situations:

(a) If FinePrint Ltd has available capacity.

(b) If FinePrint Ltd has no available capacity and would have to cancel an outside customer's job to accept the editor's offer.

2. Calculate the change in total contribution margin for each company if top corporate management forces FinePrint Ltd to accept the proposed $0.024 transfer price per page when it has no available capacity.

Answer 1

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