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 6,800 special parts each year. The special parts would require $25 per unit in variable production costs. The Machine Division has a bid from an outside supplier for the special parts at $36.60 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 $48 per unit, and requires $24 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 34,000 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:

a. What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 6,800 special parts per year from the Parts Division to the Machine Division? (Round your final answers to 2 decimal places.)

b. Is it in the best interests of Fyodor Corporation for this transfer to take place? Yes No

Answer 1

Answer
Calculation of Margin Lost on QR4
No of Units cut down	34000*5%	$       1,700
Per Unit Selling Price		$            48
Less: Variable Production Cost		$           -24
Less: Shipping Charges		$             -2
Contribution Margin per unit		$            22
Total margin Lost	1700*22	$     37,400
Per Unit of Special Product	37400/6800	$           5.5	A
Variable Cost of Special Order:
Variable Production Cost		$            25
Shippling Charges		$           0.5
Total Variable Cost		$         25.5	B
Minimum Price Part Division Will Need:
A+B		$            31
Maximum Price Machine Division will be ready to pay:
Selling Price from Outside		$         36.6
Range:
31<Transfer Price<36.6
Part b:
Yes