Question

In: Accounting

Assume that Division A has has a product that can be sold either to Division B...

Assume that Division A has has a product that can be sold either to Division B of the same company or to outside customers. The manager of both division are evaluated based on their own divisions return on investment. The manager are free to decide if they will participate in any internal transfers.

Division A

Capacity in units = 100,000

Number of units now being sold out to outside customers = 750,000

Selling price per unit on the outside market = $60

Variable costs per unit = $35

Fixed costs per unit = $17

Division B

# of units needed annually = 20,000

Purchase price now being paid to outside supplier = $60

Will the division managers agree to transfer and if so, within what range will the transfer be?

the manager will agree to transfer at a price between $52 - $57

the manager will agree to transfer at a price between $52 - $60

the manager will agree to transfer at a price between $35 - $60

the manager will not agree to a transfer

the manager will agree to transfer at a price between $35 - $38

Solutions

Expert Solution

Solution :The correct Option is “3rd option”

i.e YES: The division managers will agree to transfer the units from Division A to Division B and the manager will agree to transfer the units at a price between $35 - $60

Explanation: In order to promote the interest of the company as a whole the interests of both the buying and the selling divisions should be taken into account.

Therefore the transfer price should be subject to both an upper limit and a lower limit.

The upper limit is the maximum price that the selling division can charge which is equal to the selling price charged by an outside seller in the outside market i.e $ 60 AND

The lower limit is the lowest price that the buying division will try to negotiate for and that is equal to Variable Cost incurred by the selling division i.e =$ 35(As there is Excess or Surplus capacity there is no opportunity cost involved and Fixed Costs are also ignored as it is the same irrespective of the number of units that are produced by the division.

ekkarill92 answered 1 year ago
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