Question

Crede Inc. has two divisions. Division A makes and sells student desks. Division B manufactures and sells reading lamps. Each desk has a reading lamp as one of its components. Division A can purchase reading lamps at a cost of $ 9.70 from an outside vendor. Division A needs 10,600 lamps for the coming year. Division B has the capacity to manufacture 50,000 lamps annually. Sales to outside customers are estimated at 39,400 lamps for the next year. Reading lamps are sold at $ 11.77 each. Variable costs are $ 7.32 per lamp and include $ 1.28 of variable sales costs that are not incurred if lamps are sold internally to Division A. The total amount of fixed costs for Division B is $ 77,300 . Consider the following independent situations.

If Division A needs 14,400 lamps instead of 10,600 during the next year, what should be the minimum transfer price accepted by Division B and the maximum transfer price paid by Division A? (Round answers to 2 decimal places, e.g. 10.50.)

Minimum transfer price accepted by Division B:$__ per unit

Maximum transfer price paid by Division A $__ per unit

Answer 1

Minimum transfer price accepted by Division B	6.70
Maximum transfer price paid by Division A	9.70

	For 10600 Units	For 3800 Units	Total
Variable Cost	77,592.00	27,816.00	105,408.00
Variable sales costs	(13,568.00)	(4,864.00)	(18,432.00)
Profit Lost		9,454.67	9,454.67
	64,024.00	32,406.67	96,430.67
Numbe of Units			14,400.00
Price per Unit			6.70

No. of Lamps Needed	14,400.00
Idle Capacity	10,600.00
Excess Required	3,800.00

	Division B
Sales	463,738.00
VC	288,408.00
Contribution	175,330.00
Fixed Cost	77,300.00
Operating Income	98,030.00
Operating Income per Unit	2.49

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