Question

Fedori Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers. The company's Machinery Division has asked the Parts Division to provide it with 4,000 special parts each year. The special parts would require $23.00 per unit in variable production costs. The Machinery Division has a bid from an outside supplier for the special parts at $37.00 per unit.

In order to have time and space to produce the special part, the Parts Division would have to cut back the production of another part--the YR24 that it presently is producing. The YR24 sells for $40.00 per unit and requires $28.00 per unit in variable production costs. The packaging and shipping costs of the YR24 are $3.00 per unit. The allocated fixed production costs per unit of YR24 is $4.00.

1.) Fedori Packaging and shipping costs for the new special part to the Machinery Division would be only $1.50 per unit. The Parts Division is now producing and selling 15,000 units of the YR24 each year. Production and sales of the YR24 would drop by 19% if the new special parts are made for the Machinery Division. What lowest unit transfer price the Parts Division would be willing to agree to for the transfer of 4,000 special parts per year?

2.) What highest unit transfer price the Machinery Division would be willing to agree to for the transfer of 4,000 special parts per year?

3.) Instead of the special part listed above, the Machinery Division has changed plans and now wants 3700 units of a more complicated part it has named PartX. PartX is an industrial quality version of the YR24 that is currently produced for customers. The Machinery Division has a bid from an outside supplier for PartX at $44.60 per unit. PartX would require $26.30 per unit in variable production costs for the Parts Division to make, in addition to $1.80 per unit in packaging and shipping costs. For every PartX transferred, there would one less YR24 produced and sold. What is the dollar effect on Fedori Corporation's operating income if the transfer of PartX takes place?

Answer 1

Answer 1
Variable cost
Variable production costs	$   23.00
Packaging and shipping	$     1.50
Contribution lost on other sales	$     6.41
Lowest transfer price	$   30.91
Answer 2
The highest transfer price will be the price the Machinery division pays to the outside market. So, the highest transfer price will be $ 37.
Answer 3
Variable cost
Variable production costs	$   26.30
Packaging and shipping	$     1.80
Contribution lost on other sales	$     9.00
Lowest transfer price	$   37.10
Benefit	$     7.50
Number of units	3,700
Effect on operating Income	$ 27,750

Calculations:

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