Question

Tulip Company is made up of two divisions: A and B. Division A produces a widget that Division B uses in the production of its product. Variable cost per widget is $0.95; full cost is $1.40. Comparable widgets sell on the open market for $1.90 each. Division A can produce up to 1.80 million widgets per year but is currently operating at only 50 percent capacity. Division B expects to use 90,000 widgets in the current year.

1. Determine the minimum and maximum transfer prices. (Enter your answers to 2 decimal places.)

2. Calculate Tulip Company’s total benefit of having the widgets transferred between these divisions.

3. If the transfer price is set at $.95 per unit, determine how much profit Division A will make on the transfer. Determine how much Division B will save by not purchasing the widgets on the open market. (Round your answers to 2 decimal places.)

4. If the transfer price is set at $1.90 per unit, determine how much profit Division A will make on the transfer. Determine how much Division B will save by not purchasing the widgets on the open market. (Round your answers to 2 decimal places.)

5. What transfer price would you recommend to split the difference? (Round your answer to 3 decimal places.)

Answer 1

					All in $
	Division A		Production Widget
			Normal capacity	1,800,000
			Utilised capacity	900,000
			VC	0.95
			Total cost	1.4
			MP of product	1.9
	Division B		Requirement	90,000
			Minimum TP	0.95	Is equal to marginal cost
			Maximum TP	1.9	The maximum transfer price will be the market price because the buying division will not pay a higher price on an internal transfer when they can purchase the goods for a lower price externally
2	Tulip company total benefit			0.95	per widget
			Loss by Divison A on selling product internally-(1.90-1.40)*90000	(45,000.00)
			Gain by division B on purchasing it internally(1.90-0.95)*90000	85,500.00
				40,500.00
3 and 4				TP is 0.95	TP is 1.90
			Profit by Divison A on transfer
			SP on sale of 810000	1,539,000.00	1539000
			SP on sale of 90000	85,500.00	171000
			Less: VC on sale of 900000 widget	(855,000.00)	-855000
			Contribution	769,500.00	855,000.00
			Less: FC(1.4-0.95)	405,000.00	405,000.00
			Profit by Divison A	364,500.00	450,000.00
			Note: DivisionA will not make any profit on transfer at 0.95
			Gain by division B on purchasing it internally(1.90-0.95)*90000	85,500.00	0