Question

Kaila Company’s Body Lotion Division produces a body lotion that is used by manufacturers of various body butter products. Sales and cost data on the body lotion follow:

Selling price per unit on the intermediate market . . . . . . . . .$70

Variable costs per unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $45

Fixed costs per unit (based on capacity) . . . . . . . . . . . . . . . $10

Capacity in units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000

Number of body lotion:

Produced during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000

Sold to outside customers . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000

Kaila Company has a Body Butter Division that could use this body lotion in one of its products. The

Body Butter Division will need 5,000 body lotions per year. It has received a quote of $60 per body lotion

from another manufacturer.

Required:

1. Assume that the Body Lotion Division is now selling only 20,000 body lotions per year to outside

customers. Can the selling division and buying division negotiate for the transfer price? Calculate the lower and upper acceptable transfer price!

2. Assume that the Body Lotion Division is selling 28,000 of the body lotions it can produce to outside

customers. Can the selling division and buying division negotiate for the transfer price? Calculate the lower and upper acceptable transfer price!

3. Assume that the Body Lotion Division selling all the speackers at cost to Body Butter Division. Can they still get profit for their divison? Which one is better, negotiated transfer price or transfer at cost for the selling division?

Answer 1

Answer-1:

(i) Yes, the Selling and buying division can negotiate with a range of acceptable transfer prices between $45 - $60

(ii) Lower transfer price:

  Selling division (lower transfer price) = Variable cost + (Total contribution margin lost sales / No. of units transferred)

= $45 + 0 / 5,000 = $45

Upper transfer price:

  Buying division (upper transfer price) = Cost of buying from outside supplier = $60

Answer-2:

(i) No, the Selling and buying division can not negotiate with a range of acceptable transfer prices as costs are same in $60

(ii) Lower transfer price:

  Selling division (lower transfer price) = Variable cost + (Total contribution margin lost sales / No. of units transferred)

= $45 + ($70 - $45) × 3,000 / 5,000 = $45 + $15 = $60

Upper transfer price:

  Buying division (upper transfer price) = Cost of buying from outside supplier = $60

Answer-3:

Transfer price is better than transfer at cost for selling division to avoid non profit case for Body Lotion Division when selling all the body lotions at cost to Body ButterDivision