Question

Collyer Products Inc. has a Valve Division that manufactures and sells a standard valve as follows:

Capacity in units		230,000
Selling price to outside customers on the intermediate market		$ 16
Variable costs per unit		$ 10
Fixed costs per unit (based on capacity)		$   7

  

The company has a Pump Division that could use this valve in the manufacture of one of its pumps. The Pump Division is currently purchasing 20,000 valves per year from an overseas supplier at a cost of $15 per valve.

Required:

1.	Assume that the Valve Division has ample idle capacity to handle all of the Pump Division's needs. What is the acceptable range, if any, for the transfer price between the two divisions?

    

2.	Assume that the Valve Division is selling all that it can produce to outside customers on the intermediate market. What is the acceptable range, if any, for the transfer price between the two divisions?

  

3.	Assume again that the Valve Division is selling all that it can produce to outside customers on the intermediate market. Also assume that $3 in variable expenses can be avoided on transfers within the company, due to reduced selling costs. What is the acceptable range, if any, for the transfer price between the two divisions?

  

4.	Assume the Pump Division needs 25,000 special high-pressure valves per year. The Valve Division's variable costs to manufacture and ship the special valve would be $11 per unit. To produce these special valves, the Valve Division would have to reduce its production and sales of regular valves from 230,000 units per year to 180,000 units per year. As far as the Valve Division is concerned, what is the lowest acceptable transfer price? (Round your answer to 2 decimal places.)

Answer 1

Transfer price = Variable cost + Opportunity cost of comtribution forgone due to internal transfer

Variable cost and opportunit cost is relevant cost here , Fixed cost are the cost which is already incurred and will not be considered.

1. Acceptable range will be $10 to $15 or $15≥ TP ≥ $10

In first case as given Valve devision has ample Quantity hence due to internal transfer there will be no loss and fixed cost are already cover with external sales.

Minimum Transfer price to seller= Variable cost+ opportunity cost of contribution gone

=$10 +0 =$10

Maximum price to buyer ie Pump division =$15

2.Acceptable range will be 0 ie No transfer agreement will be exercise between two division as buying from outside market will be profitable to Division pump and selling to outsider will be profitable to Division Valve.

Minimum transfer price to seller = $10 + Contribution forgone for 20000 unit for outsider

=$10+(16-10)×20000/20000

=10+6

=16

Buyer division minimum buying price =$15

3.Acceptable range is $13 to $15 or 15≥ TP≥ 13

Buyer division minimum transfer price = $15

Selling division mimimum transfer price = (Variable price - Saving in selling cost due to internal transfer ) + contribution forgone

=(10-3) +(16-10)×20000/20000

=7+6

=$13

4. Miniimum transfer price that valve division will charge per unit will be $23

As the production capacity is reduce due to special valve and this is contributiom loss on regular valve to valve division

Transfer price for Valve division will be = Variable cost of specialise valve + Contribution gone for the regular valve

=$11+ (16-10)×(50000)/25000

=11+12

=$23

Regular valve production and sales are reducing by 50000 unit for 25000 special item hence contribution is gone twice for 1 special part

if we sold to outsider 50000 unit we will get total contribution=50000×6 =300000

And to cover this we have to collection from trasferring division this much of contribution loss =300000/25000

=$12 per unit