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 $10 from an outside vendor. Division A needs 10,300 lamps for the coming year. Division B has the capacity to manufacture 48,100 lamps annually. Sales to outside customers are estimated at 37,800 lamps for the next year. Reading lamps are sold at $12 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 $84,600. Consider the following independent situations

If Division A needs 20,600 lamps instead of 10,300 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

SOLUTION:

1. Minimum Transfer price accepted by Division B

Variable Cost for Manufacturing = Variable Cost - Selling VC

= 7 - 1

= $ 6

Minimum Transfer price accepted by Division B is $ 6 per Unit

Maximum Transfer Price paid by Division A:

Purchase Price if it purchases from outside Vendors = $ 10 per Unit

Hence, Maximum Transfer Price paid by Division A is $ 10 per unit

2. Minimum Transfer price accepted by Division B

Contribution = 12 - 7

= $ 5 per Unit

Free Capacity = Production Capacity - External Capacity

= 48100 - 37800

= 10,300

Loss of Sale = Free Capacity - Required Units

= 10300 - 20600

= 10300

Opportunity Cost per Unit = Loss of Contribution / required units

= 10300(12-7) / 20600

= 10300*5 / 20600

= 51500 / 20600

= 2.5

Minimum Transfer price accepted by Division B = 7-1+2.5 = $ 8.5 per unit

Hence, Minimum Transfer price accepted by Division B is $ 8.5 per Unit

Maximum transfer price paid by Division A

Purchase Price if it purchases from outside Vendors = $ 10 per Unit

Hence, Maximum Transfer Price paid by Division A is $ 10 per unit