Bell Computers has an Accessories division that produces various computer accessories and is evaluated on divisional profits. One of the accessories produced by the Accessories division is a solid-state drive (SSD). The SSD is sold both to third-party distributors as well as transferred internally to the laptops division of Bell Computers. The Accessories division has the capacity to produce 50,000 SSDs. External market demand for Bell Computer’s SSDs is 30,000. In addition, the laptops division requires 20,000 SSDs. The accessories division sells the SSD to third-party distributors at $400. Variable costs of producing an SSD is $150 and fixed costs are $5 million. One of the parts of the SSD is a controller that is currently produced by the Accessories division. The variable cost of the controller is $70. In addition, the controller is manufactured on a machine exclusively used for controllers. Currently, this machine is leased by the Accessories division for $1 million. The current lease on the machine is about to expire. The manager of the Accessories division is deciding whether to renew the lease since a neighboring firm has offered to supply the Accessories division with the controllers at $100 per controller.
a) Would Bell Computers prefer outsourcing controller production?
b) If Bell Computers uses the optimal transfer pricing rule for internal transfers, will the manager of the Accessories division prefer to outsource the production of controllers?
c) If Bell Computers uses full absorption costing for internal transfers, will the manager of the Accessories division prefer to outsource the production of controllers?
All the cases supports Bell computers to prefer for producing the controller unit instead of outsourcing
| Optimal Transfer Pricing | ||||
| Make | Outsource | |||
| Sales- External | 1,20,00,000.00 | =30,000 units @ $400 | 1,20,00,000.00 | =30,000 units @ $400 |
| Sales- Internal | 80,00,000.00 | =20,000 Units @ $400 | 80,00,000.00 | =20,000 Units @ $400 |
| 2,00,00,000.00 | 2,00,00,000.00 | |||
| Variable Cost | 75,00,000.00 | =50,000 units @ 150 | 40,00,000.00 | =50,000 units @ 80 |
| Fixed Cost | 50,00,000.00 | 40,00,000.00 | =5 Million - 1 Million | |
| 1,25,00,000.00 | 80,00,000.00 | |||
| Controller | 50,00,000.00 | =50,000 Units @ 100 | ||
| 1,30,00,000.00 | ||||
| Profit | 75,00,000.00 | 70,00,000.00 | ||
| Full Absorption Costing | ||||
| Make | Outsource | |||
| Sales- External | 1,20,00,000.00 | =30,000 units @ $400 | 1,20,00,000.00 | =30,000 units @ $400 |
| Sales- Internal | 50,00,000.00 | =20,000 Units @ $250 | 50,00,000.00 | =20,000 Units @ $250 |
| 1,70,00,000.00 | 1,70,00,000.00 | |||
| Variable Cost | 75,00,000.00 | =50,000 units @ 150 | 40,00,000.00 | =50,000 units @ 80 |
| Fixed Cost | 50,00,000.00 | 40,00,000.00 | =5 Million - 1 Million | |
| 1,25,00,000.00 | 80,00,000.00 | |||
| Controller | 50,00,000.00 | =50,000 Units @ 100 | ||
| 1,30,00,000.00 | ||||
| Profit | 45,00,000.00 | 40,00,000.00 | ||
Profit is high when manufacturing the controller unit in both the cases,
| Unit Price at full Absorption Cost Model | ||||
| Variable Cost Per unit | 150.00 | |||
| Fixed Cost Per unit @ 50000 units | 100.00 | =5,000,000/50,000 | ||
| 250.00 | ||||
Bell Computers has an Accessories division that produces various computer accessories and is evaluated on divisional...