Question

Bangles Inc. manufactures and sells engines and lawn mowers. There are two divisions in Bangles Inc., the Dalton and the Green divisions. Small engines are manufactured in the Green Division. These engines are purchased by the Dalton Division but are also sold in the external market. The capacity of the Green Division is 30,000 engines. Dalton division needs 10,000 of the small engines annually. If Green did not sell to Dalton, Green could sell its entire capacity of 30,000 engines in the external market. The following information is available:

                       

                        External market price for one engine:                       $85

                        Variable product cost per engine $48

                        Variable production cost per engine $ 6

                        Fixed cost per engine (based on division capacity) $12

Dalton can purchase 10,000 engines that it needs from an outside supplier at $80 per engine or it can purchase the Green division (internal transfer).

1. If Dalton wants to purchase 10,000 engines from Green Division, the minimum acceptable transfer price from the perspective of the selling division (Green) would be:

2. If half of the variable marketing cost could be avoided by selling to Dalton Division, the minimum acceptable transfer price from the perspective of the selling division would be:

3. If Green division expanded its plant capacity to 50,000 engines, and the maximum engines that it could sell in the external market remained at 30,000 engines, the minimum acceptable transfer price from the perspective of the selling division would be (assuming half of the variable marketing costs continue to be avoidable on internal transfers):

4. Assume the situation described in C. Managers of Green and Dalton have agreed to a negotiated transfer price of $67. Further, assume that Dalton had previously been purchasing the engines from an outside supplier at $80 per engine. What is the impact on TOTAL profitability for Bangles Inc if Dalton division buys the 10,000 engines from Green at the agreed transfer price.

Answer 1

Ans
		30000	10000	30000
1)		Green Division	Capacity 10000	Capacity 10000
	Sales	85
	Variable Cost	48	480000	1440000
	Variable production cost	6	60000	180000
	Contribution per unit	31
	Total	85	540000	1620000
			54
	Fixed cost will be ignore as it will incurred regardless of production
	Variable Cost	54
	Opportunity Cost	31
	Minimum transfer price	85
	As Green division have external market the it's minimum Transfer price $ 85 only
		30000	10000	30000
2		Green Division	Capacity 10000	Capacity 10000
	Sales	85
	Variable Cost	48	480000	1440000
	*Variable production cost	6	60000	180000
	Contribution per unit	31
	Total	85	540000	1620000
			54
	* Assume that variable production cost is Variable Marketing cost as nothing is being mention here about
	Marketing cost
	Variable Cost	48
	*Variable production cost	3
	Opportunity Cost	31
	Minimum transfer price	82
	As half of production cost can be avoided by selling internally then minimum price would be $82 per engine
3	Variable Cost	48
	*Variable production cost	3
	Opportunity Cost
	Minimum transfer price	51
	As capacity is increase but no external market then minimum transfer price should be $51
	& even marketing cost is also half due to internal transfer
			30000		10000
4		Grenn Division					Dalton Division		Internal Buy	External Buy	Diff in profit
		Green Division	30000 External Sales	Internal Rate	10000 Internal Sales	Total	Internal	External @ 80	Over all Profit	Over all Profit
	Variable Cost	48	1440000	48	480000	1920000	670000	800000
	*Variable production cost	6	180000	3	30000	210000	0	0
	Total Variable cost	54	1620000	51	510000	2130000	670000	800000
	Sales price		85		67		0	0
	sales Value in $		2550000		670000	3220000	0	0
	Profit		930000		160000	1090000	-670000	-800000	1510000	130000	1380000
	Fixed cost is being ignore in above calculation
	It is clear from above working that if bangles Inc buying internally then it can gain profit up to $ 1510000 without Fixed cost, & if it is buying externally it gain
	up to $ 130000
	Capacity 50000
		Internal Buy	External Buy	Diff in profit
	Profit	1510000	130000	1380000
	Fixed cost	600000	600000	0
	Net profit	910000	-470000	1380000
	* condition while increasing capacity fixed cost also increase that extend