Question

Fyodor Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers. The company's Machine Division has asked the Parts Division to provide it with 4800 special parts each year. The special parts would require $15 per unit in variable production costs.

The Machine Division has a bid from an outside supplier for the special parts at $23.10 per unit. In order to have time and space to produce the special part, the Parts Division would have to cut back production of another part-the QR4 that it presently is producing. The QR4 sells for $28 per unit, and requires $14 per unit in variable production costs. Packaging and shipping costs of the QR4 are $2 per unit. Packaging and shipping costs for the new special part would be only $0.50 per unit. The Parts Division is now producing and selling 24,000 units of the QR4 each year. Production and sales of the QR4 would drop by 5% if the new special part is produced for the Machine Division.

Required:

Please calculate the following:

Fyodor Parts Division Selling transfer price (rounded to 2 decimal places)

Fyodor Machine Division Buying Transfer price (rounded to 2 decimal places)

Should the transfer take place (Yes or No)

Answer 1

Selling price will be equal to the incremental cost + Margin lost
Variable production cost 4800*15	72,000
Packaging and Shipping cost 4800*0.5	2,400
Contribution Margin lost on QR4 (28-14-2)*24000*5%	14,400
Total cost	88,800
Selling transfer price per unit 88,800/4800	18.50
Buying transfer price is equal to current outside price	i.e. $23.10 per part
Yes, since selling price is less than the buying price