Question
In: Accounting
San Jose Company operates a Manufacturing Division and an Assembly Division. Both divisions are evaluated as...
San Jose Company operates a Manufacturing Division and an Assembly Division. Both divisions are evaluated as profit centers. Assembly buys components from Manufacturing and assembles them for sale. Manufacturing sells many components to third parties in addition to Assembly. Selected data from the two operations follow.
| Manufacturing | Assembly | |||||
| Capacity (units) | 412,000 | 212,000 | ||||
| Sales pricea | $ | 424 | $ | 1,360 | ||
| Variable costsb | $ | 220 | $ | 504 | ||
| Fixed costs | $ | 40,120,000 | $ | 24,120,000 | ||
a For Manufacturing, this is the price to third parties.
b For Assembly, this does not include the transfer
price paid to Manufacturing.
Suppose Manufacturing is located in Country A with a tax rate of
60 percent and Assembly in Country B with a tax rate of 40 percent.
All other facts remain the same.
Required:
a. Current production levels in Manufacturing are 212,000 units. Assembly requests an additional 52,000 units to produce a special order. What transfer price would you recommend?
b. Suppose Manufacturing is operating at full capacity. What transfer price would you recommend?
c. Suppose Manufacturing is operating at 386,000 units. What transfer price would you recommend? (Round your answer to 2 decimal places.)
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Solutions
Expert Solution
| a | Optimal transfer price | $ 220 per unit | ||
| Here the Manufacturing division is operating below its full capacity, so the optimal transfer price | ||||
| would be the variable cost. New orders from the Assembly division will not exceed the full capacity. | ||||
| b | Transfer price | $ 424 per unit | ||
| Here the Manufacturing division is operating at full capacity and this division is also fulfilling the | ||||
| market demand. It would be a loss of contribution for Manufacturing division if it makes a supply | ||||
| at a price below its current selling price. So the recommend transfer price would be the market price. | ||||
| c | Transfer price | $ 322 per unit | ||
| * | Here the Manufacturing division is operating below its full capacity, but if it fulfills the order for | |||
| Assembly division it will exceed the full capacity. | ||||
| * | Number of units availabe after manufacturing 386,000 units = 26,000 units (412,000 - 386,000) | |||
| * | Balance no.of units required to meet the demand of Assembly = 26,000 units (52,000 - 26,000) | |||
| * | Manufacturing division can transfer these 26,000 units at its variable cost i.e at $ 220 per unit. | |||
| * | Remaining 26,000 units can be supplied at a market price i.e at $ 424 per unit. | |||
| Total cost for 40,000 units: | ||||
| For 26,000 units | 5720000 | (26,000 units X $ 220) | ||
| For 26,000 units | 11024000 | (26,000 units X $ 424) | ||
| Total | 16744000 | |||
| Cost per unit = | (Total cost / total number of units) | |||
| = | ($ 16,744,000 / 52,000) | |||
| = | $ 322 per unit | |||
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