Question

Tiger Inc. has two autonomous wo autonomous divisions. A Division produces a technical component and its capacity is 10 000 ... any is 10.000 units annually. Currently. A Division sells its product at a sale price of $190 per unit to external customers. Costs per unit of A Division: Prime costs MOH variable Fixed MOH Marketing variable expenses $50.00 $40.00 $30.00 $20.00 B Division could use the technical component in the manufacturing of its computer products for next year. Variable selling expenses on sales between divisions are reduced by 40%. Alternatively, the B Division could buy this component from a Chinese supplier for $120 per unit. In addition, B Division would have to pay customs duties of $10 per unit on imported components.

Answer 1

3.a. Division A currently has idle capacity of 1,000 units. If it were to accept Division B's order of 2,000 units, it would lose 1,000 units of regular orders. Therefore, there is an opportunity cost involved.

Contribution margin per unit of regular sales of Division A = $ 190 - $ ( 50 + 40 + 20) = $ 80

Opportunity cost per unit of lost sales = $ 80,000 / 1,000 = $ 80.

Minimum acceptable transfer price for Division A = Variable Expenses + Opportunity Cost = $ ( 50 + 40 + 12 ) + $ 80 = $ 182

Maximum acceptable transfer price for Division B = $ 120 + $ 10 = $ 130.

3.a. No, the transfer between Division A and Division B is not possible, as the maximum price that Division B would be willing to pay is less than the minimum price acceptable to Division A.