Question

Division X has asked Division K of the same company to supply it with 5,610 units of part L433 this year to use in one of its products. Division X has received a bid from an outside supplier for the parts at a price of $29.50 per unit. Division K has the capacity to produce 33,500 units of part L433 per year. Division K expects to sell 29,200 units of part L433 to outside customers this year at a price of $33.50 per unit. To fill the order from Division X, Division K would have to cut back its sales to outside customers. Division K produces part L433 at a variable cost of $22.40 per unit. The cost of packing and shipping the parts for outside customers is $2.00 per unit. These packing and shipping costs would not have to be incurred on sales of the parts to Division X.

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 5,610 parts this year from Division X to Division K? (Round your intermediate calculations and final answers to 2 decimal places. Omit the "$" sign in your response)

The Transfer price can be greater than $  but less than $  .

b.	Is it in the best interests of the overall company for this transfer to take place?
	Yes No

c.	What is the increase in Company's profit for each unit transferred? (Round your intermediate calculations and final answer to 2 decimal places. Omit the "$" sign in your response)

Per unit increase in profit

$

Answer 1

Answer a : The Transfer price can be greater than $24.52  but less than $29.50  

Explanation :

Since Division K expects to sell 29,200 units but it has the capacity to produce 33,500 units. Thus to supply 5,610 units to Division X   , Division K will lose sales of 1,310 units (29,200 + 5,610 - 33,500).   Thus Division K expects that transfer price must be greater per unit variable cost of production + per unit opportunity cost.

Opportunity cost = [($33.50 -  $22.40 - $2) * 1,310 units] / 5,610 units. = $2.12

Transfer price can be greater : Variable cost + Opportunity cost

= $22.40 + $2.12 = $24.52

Transfer price can be less than -

Transfer price must be less than the maximum price that Division X is willing to outside supplier = $29.50 per unit.  

Answer b. Yes.

Explanation : If the trasfer takes place the overall cost per unit for the company will remain at $24.52 which is less than cost per unit from  outside supplier ie $29.50.

Answer c.  Per unit increase in profit $4.98

Explanation :

Increase in Company's profit for each unit transferred = $29.50 - $24.52 = $4.98.