Question

Division Y has asked Division X of the same company to supply it with 8,000 units of part L763 this year to use in one of its products. Division Y has received a bid from an outside supplier for the parts at a price of $48 per unit. Division X has the capacity to produce 32,000 units of part L763 per year. Division X expects to sell 28,800 units of part L763 to outside customers this year at a price of $52.00 per unit. To fill the order from Division Y, Division X would have to cut back its sales to outside customers. Division X produces part L763 at a variable cost of $40 per unit. The cost of packing and shipping the parts for outside customers is $2 per unit. These packing and shipping costs would not have to be incurred on sales of the parts to Division Y.

Required:

a. What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 8,000 parts this year from Division X to Division Y? (Round your final answers to 2 decimal places.)

	Range of transfer prices: < Transfer price <

b. Is it in the best interests of the overall company for this transfer to take place?

Answer 1

Maximum transfer price for buying division is price offered from supplier:
Maximum transfer price = $48
Minimum transfer price is variable cost of producing the articles for the division and loss of contribution from outside sales
Loss of sales units:
Units required		8000
Less: Capacity available	4200
Loss of sales units:		3800
Contribution per unit:
Selling price		52
less: variable cost		40
Contribution per unit:	12
Minimum price is:
Variable cost (8000*38)	304000
Loss of contribution (3800*12)	45600
Total price of 8000 units	349600
Divide: Units		8000
Minimum price is:		43.7
Range of Transfer price:Minimum of $ 43.70 to Maximum of $48
Yes, the company will gain overall to the extent of $ 4.30 per unit