Question

Exercise 8-16

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 10,000 lamps for the coming year.

Division B has the capacity to manufacture 50,000 lamps annually. Sales to outside customers are estimated at 40,000 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 $80,000.

Consider the following independent situations.



What should be the minimum transfer price accepted by Division B for the 10,000 lamps 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

Suppose Division B could use the excess capacity to produce and sell externally 15,000 units of a new product at a price of $7 per unit. The variable cost for this new product is $5 per unit. What should be the minimum transfer price accepted by Division B for the 10,000 lamps 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

If Division A needs 15,000 lamps instead of 10,000 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

Case 1
There is excess capacity of 10,000 lamps with division B
Variable cost	7.00
Irrelevant cost	(1.00)
Relevant variable cost	6.00
Minimum price acceptable to division B	6.00
Maximum price payable by division A- Paid to outside vendor	10.00
Case 2
Division B is producing new products
New product contribution (7-5)	2.00
New product count	15,000.00
New contribution	30,000.00
Excess capacity to be used for lamps	10,000.00
Contribution lost per lamp	3.00
Minimum price acceptable to division B (6+3)	9.00
Maximum price payable by division A- Paid to outside vendor	10.00
Case 3
Regular Production lost	5,000.00
New product production lost	15,000.00
New product contribution (7-5)	2.00
New product count	15,000.00
New contribution lost	30,000.00
Regular product contribution lost (12-6)	6.00
Regular Production lost	5,000.00
Regular contribution lost	30,000.00
Total contribution lost	60,000.00
Units	15,000.00
Contribution lost per lamp	4.00
Variable cost	6.00
Minimum price acceptable to division B	10.00
Maximum price payable by division A- Paid to outside vendor	10.00