Question

In: Accounting

Weller Industries is a decentralized organization with six divisions. The company’s Electrical Division produces a variety...

Weller Industries is a decentralized organization with six divisions. The company’s Electrical Division produces a variety of electrical items, including an X52 electrical fitting. The Electrical Division (which is operating at capacity) sells this fitting to its regular customers for $8.70 each; the fitting has a variable manufacturing cost of $4.80.

The company’s Brake Division has asked the Electrical Division to supply it with a large quantity of X52 fittings for only $6.70 each. The Brake Division, which is operating at 50% of capacity, will put the fitting into a brake unit that it will produce and sell to a large commercial airline manufacturer. The cost of the brake unit being built by the Brake Division follows:

Purchased parts (from outside vendors) $ 23.80
Electrical fitting X52 6.70
Other variable costs 14.53
Fixed overhead and administration 8.60
Total cost per brake unit $ 53.63

Although the $6.70 price for the X52 fitting represents a substantial discount from the regular $8.70 price, the manager of the Brake Division believes the price concession is necessary if his division is to get the contract for the airplane brake units. He has heard “through the grapevine” that the airplane manufacturer plans to reject his bid if it is more than $55 per brake unit. Thus, if the Brake Division is forced to pay the regular $8.70 price for the X52 fitting, it will either not get the contract or it will suffer a substantial loss at a time when it is already operating at only 50% of capacity. The manager of the Brake Division argues that the price concession is imperative to the well-being of both his division and the company as a whole.

Weller Industries uses return on investment (ROI) to measure divisional performance.

Required:

1. Assume that you are the manager of the Electrical Division.

a. What is the lowest acceptable transfer price for the Electrical Division?

b. Would you supply the X52 fitting to the Brake Division for $6.70 each as requested?

2. Calculate the net positive effect on the company's profit per brake unit the Electrical Division to supply the fittings to the Brake Division and if the airplane brakes can be sold for $55?

3. In principle, within what range would that transfer price lie?

Solutions

Expert Solution

Meaning :Transfer Price is the amount of Money that one Sub-unit (Segment, Department, Division) of an orgnisation charges for goods & services to another sub-unit of an orgnisation.

The method of transfer Price would be 3 types

(i) Cost based method

(ii) Negotiated

(iii) Market Based

Cost based method : when suppluing division has full spare capacity to transfer goods and services to another division then the minimum transfer price would be at varriable Cost.

Negotiated : When suppyling division has partial spare capacity to transfer goods and services to another division then the minimum price would be Varriable cost plus other benifits loss for occuring the secrifices to transfer their goods and services to another division.

Market Based : When supplying division has no spare capacity then the minimum transfer price would be based on market price or varriable cost plus contribution loss

Ans-1 (a): So as per the above question the Electrical divison has full spare capacity then the varriable cost would be minimum price as 4.70 $

Ans-1 (b): Yes I will supply the X52 fitting to the Brake Division for $6.70 each as requested


Related Solutions

Weller Industries is a decentralized organization with six divisions. The company’s Electrical Division produces a variety...
Weller Industries is a decentralized organization with six divisions. The company’s Electrical Division produces a variety of electrical items, including an X52 electrical fitting. The Electrical Division (which is operating at capacity) sells this fitting to its regular customers for $10.00 each; the fitting has a variable manufacturing cost of $5.23. The company’s Brake Division has asked the Electrical Division to supply it with a large quantity of X52 fittings for only $8.00 each. The Brake Division, which is operating...
Weller Industries is a decentralized organization with six divisions. The company’s Electrical Division produces a variety...
Weller Industries is a decentralized organization with six divisions. The company’s Electrical Division produces a variety of electrical items, including an X52 electrical fitting. The Electrical Division (which is operating at capacity) sells this fitting to its regular customers for $8.30 each; the fitting has a variable manufacturing cost of $4.70. The company’s Brake Division has asked the Electrical Division to supply it with a large quantity of X52 fittings for only $6.30 each. The Brake Division, which is operating...
Weller Industries is a decentralized organization with six divisions. The company’s Electrical Division produces a variety...
Weller Industries is a decentralized organization with six divisions. The company’s Electrical Division produces a variety of electrical items, including an X52 electrical fitting. The Electrical Division (which is operating at capacity) sells this fitting to its regular customers for $14.00 each; the fitting has a variable manufacturing cost of $8.85. The company’s Brake Division has asked the Electrical Division to supply it with a large quantity of X52 fittings for only $8.50 each. The Brake Division, which is operating...
Weller Industries is a decentralized organization with six divisions. The company’s Electrical Division produces a variety...
Weller Industries is a decentralized organization with six divisions. The company’s Electrical Division produces a variety of electrical items, including an X52 electrical fitting. The Electrical Division (which is operating at capacity) sells this fitting to its regular customers for $14.90 each; the fitting has a variable manufacturing cost of $9.05. The company’s Brake Division has asked the Electrical Division to supply it with a large quantity of X52 fittings for only $9.10 each. The Brake Division, which is operating...
Weller Industries is a decentralized organization with six divisions. The company’s Electrical Division produces a variety...
Weller Industries is a decentralized organization with six divisions. The company’s Electrical Division produces a variety of electrical items, including an X52 electrical fitting. The Electrical Division (which is operating at capacity) sells this fitting to its regular customers for $9.30 each; the fitting has a variable manufacturing cost of $5.00. The company’s Brake Division has asked the Electrical Division to supply it with a large quantity of X52 fittings for only $7.30 each. The Brake Division, which is operating...
Case 11A-7 Transfer Pricing; Divisional Performance [LO11-5] Weller Industries is a decentralized organization with six divisions....
Case 11A-7 Transfer Pricing; Divisional Performance [LO11-5] Weller Industries is a decentralized organization with six divisions. The company’s Electrical Division produces a variety of electrical items, including an X52 electrical fitting. The Electrical Division (which is operating at capacity) sells this fitting to its regular customers for $10.00 each; the fitting has a variable manufacturing cost of $5.23. The company’s Brake Division has asked the Electrical Division to supply it with a large quantity of X52 fittings for only $8.00...
Case 11A-7 Transfer Pricing; Divisional Performance [LO11-5] Weller Industries is a decentralized organization with six divisions....
Case 11A-7 Transfer Pricing; Divisional Performance [LO11-5] Weller Industries is a decentralized organization with six divisions. The company’s Electrical Division produces a variety of electrical items, including an X52 electrical fitting. The Electrical Division (which is operating at capacity) sells this fitting to its regular customers for $8.10 each; the fitting has a variable manufacturing cost of $4.58. The company’s Brake Division has asked the Electrical Division to supply it with a large quantity of X52 fittings for only $6.10...
Silicon Industries is a decentralized company with two divisions: mining and processing. They are both evaluated...
Silicon Industries is a decentralized company with two divisions: mining and processing. They are both evaluated as profit centres. The mining division transfers raw diamonds to the processing division. The processing division is currently operating at 1 million kg below its capacity, while the mining division is operating at full capacity. The mining division can sell raw diamonds externally at $75 per kilogram. The unit cost of 1 kg of polished diamonds produced by the processing division is as follows:...
Transfer Pricing Fillmore Industries is a vertically integrated firm with several divisions that operate as decentralized...
Transfer Pricing Fillmore Industries is a vertically integrated firm with several divisions that operate as decentralized profit centers. Fillmore’s Systems Division manufactures scientific instruments and uses the products of two of Fillmore’s other divisions. The Board Division manufactures printed circuit boards (PCBs). One PCB model is made exclusively for the Systems Division using proprietary designs, while less complex models are sold in outside markets. The products of the Transistor Division are sold in a well-developed competitive market; however, one transistor...
Mountain Industries operates a Manufacturing Division and an Assembly Division. Both divisions are evaluated as profit...
Mountain Industries 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) 215000 115000 Sales price * $ 108 $ 375 Variable costs† $ 48 $ 150 Fixed costs $ 10150000 $ 6150000 * For Manufacturing, this is the price to third parties....
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT