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) | 404,000 | 204,000 | ||||
| Sales pricea | $ | 408 | $ | 1,320 | ||
| Variable costsb | $ | 180 | $ | 488 | ||
| Fixed costs | $ | 40,040,000 | $ | 24,040,000 | ||
|
|
||||||
a For Manufacturing, this is the price to third parties.
b For Assembly, this does not include the transfer price paid to Manufacturing.
Required:
a. Current production levels in Manufacturing are 204,000 units. Assembly requests an additional 44,000 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 382,000 units. What transfer price would you recommend? (Round your answer to 2 decimal places.)
Solutions
Expert Solution
| a. | Optimal Transfer price | = | $ 180.00 |
| When selling division is operating below capacity (including additional units ordered by buying division i.e 2,04,000 units + 44,000 units = 2,48,000 units which is less than total capacity pf 4,04,000 units, then the optimal transfer price is equal to variable cost per unit. | |||
| b. | Optimal Transfer price | = | $ 408.00 |
| When at capacity, for additional units transfer price should be equal to market price (selling price). | |||
| c. | Optimal Transfer price | = | $ 294.00 |
| Capacity | = | 4,04,000 | |
| Less: | Current Production | = | 3,82,000 |
| Total Idle Capacity | = | 22,000 | |
| Additional units | = | 44,000 | |
| Manufacturing should charge for Variable cost for 22,000 units and Market Price for remaining 22,000 units. | |||
| Total Based on Variable Cost | = | $ 39,60,000.00 | |
| (22,000 X $180) | |||
| Total based on Market Price | = | $ 89,76,000.00 | |
| (22,000 X $408) | |||
| Total (1) | = | $ 1,29,36,000.00 | |
| Total units produced (2) | = | 44,000 | |
| Optimal Transfer price (1) / (2) | = | $ 294.00 | |
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