Question

True Corporation’s Domestic Division produces wedge cutting machines, which use a component called stuff. They are considering an offer to outsource the production of stuff to jason Company who has offered to produce 50,000 stuff at a total price of $100,000. The following costs are associated with this part of the process when 50,000 stuff are produced:

Direct material                        $44,000

Direct labor                             $20,000

Manufacturing OH                 $60,000

TOTAL                                   124,000

Included in the manufacturing overhead is the $50,000 salary of a worker, who will be fired if the components are no longer produced by True corp. Since the worker also spends part of his time on other supervisory duties, a part-time person must be hired to handle these functions, at an estimated cost of $18,000. The remaining manufacturing overhead will continue whether or not True corp. makes the units or outsources the components to jason.

Regarding the outsourcing decision, is it a good idea? Should True corp. make or buy these units AND what is the amount of benefit, in dollars, to making this decision?

_____________________ better by $_______________ Make or buy

1. Now consider that if true decides to outsource, they have two alternative uses of the space, previously used to produce Wedgies.

1. They can lease out the space for $13,000.

or

2. They can use the same space to produce more of their other product, Product X. Management estimates that they will be able to produce an additional 1,000 units of Product X using the space previously used for Stuff. The following standard per-unit sale and cost information are associated with the production of Product X:

Per unit

Selling price                                                    $35

Variable costs:

Direct materials                                               $10

Direct labor                                                     $5

Variable OH                                                   $3

Variable selling                                               $2

Fixed Costs:

Fixed OH

Outsource_____________________ (Yes or no) better by $_______________

NOW ASSUME that thee Domestic Division of True Corp is producing the maximum amount of Product X that it can produce, given current manufacturing constraints.

True’s international Division is currently purchasing a product very similar to Product X to the open market for a price $30 per unit. They seek a better price from their domestic division. If the Domestic Division sells to the international Division, variable selling costs will be reduced by 75%.

Considering the objectives of the domestic and international division individually what is the range within which an appropriate transfer price would be negotiated?

Minimum_____________________ Maximum_______________

A transfer price of $31 per unit has been suggested by True management. From a quantitative perspective, would this be beneficial to the company as a whole? Why or why not-how much better off is your recommendation ?

­­­­­­­­­­­__________________ better by $_______________

Answer 1

Answer is given below