In: Accounting
1,
Department A produces product A1. A1 can be sold to internal or outside parties. | ||||||
Department B produces product SAM. | ||||||
Prodcution information is as follows. | ||||||
Dept.A | Dept B | |||||
Total fixed cost $1500000 | Total fixed cost $25000 | |||||
Variable cost per unit $175 | Variable cost per unit (excluding transfer price) $350 | |||||
Both departments have extra production capacity. The market demand is as follows. | ||||||
1. For A1, 4500 units can be sold at $350 per unit. selling price will be changed $1 for every 5 units sold. | ||||||
2. For SAM, 500 units can be sold at $1100 per unit | ||||||
Selling price per unit will be changed $75 for every 125 units sold. | ||||||
Dept A uses the market price as the transfer price to Dept B. | ||||||
Calculate selling price of SAM for the maximum profit. | ||||||
Problem 2 | ||||||
Profit center A produces 4 products for sales as folllows | ||||||
AA1 | AA2 | AA3 | AA4 | |||
market price per unit | 150 | 146 | 140 | 130 | ||
variable cost per unit | 130 | 100 | 90 | 85 | ||
labour hours required per unit | 3 | 4 | 2 | 3 | ||
market demand in units | 2800 | 2500 | 2300 | 1600 | ||
Product AA4 can be transfered to Profit Center G at the maximum 2,500 units. | ||||||
Profit Center G can purchase Product AA4 from the market at USD125 per unit. | ||||||
Calculate the transfer price of Product AA4 to Profit Center G. What is the transfer price? | ||||||
The total number of labour hours in Profit Center A is 20,000 hours. | ||||||
1. The answer to 1st question is $875.
It means at a sale price of $875 SAM can make maximum profit with sake of 875units.
Fixed costs are not considered as they are irrelevant in decisin making unless they changes between the two option.
2.The minimum transfer price of Product AA4 is $118.34.
So the transfer price rahnge can be $118.34 to $125.
This is because profit centre G can purchase the unit outside at $125 so it will not be willing to pay more than that on the other hand cost of Producing additional 2500units of AA4 to department A is $118.34 so it cannot charge less than that amount.