Question

McFarlane Company has two​ divisions, Division C and Division D. Division C manufactures Part C82 and sells it to Division​ D, and also sells the same part to the outside market for $73 per unit. Division C has capacity to make

1,200,000 units of C82 per year. The​ division's fixed costs are $ 6,500,000 per year and its variable costs per unit are as​ follows:

Part C82 is an essential component for Division​ D's only​ product; the division sells 550,000 units per year at a price of $170 per unit. Division​ D's fixed costs are $2,500,000

per year and its variable costs per​ unit, excluding the cost of Part​ C82, are as​ follows :

Requirement

Suppose Division​ C's demand for C82 from the outside market is currently 500,000 units per year. By how much will McFarlane​'s income decrease if Division D purchases its desired 550,000 units of C82 at $73

per unit from the market rather than from Division​ C? What transfer​ price(s) would you suggest to induce both divisions to want Division D to purchase from Division C instead of from the​ market?

McFarlane Company has two divisions, Division C and Division D. Division C manufactures Part C82 and sells it to to sells the same part to the outside market for $73 per unit. Division C has capacity to make apacity to make 1200,000 units of C82 per year. The division's fixed costs are $6,500,000 per year and its variable costs per unit are as follows: Part C82 is an essential component for Division D's only product, the division sells 550.000 units per year at a price of $170 per unit. Division D's fixed costs are $2.500.000 per year and its variable costs per unit, excluding price of $170 per unit. Division D's fixed costs are $2. the cost of Part C82, are as follows (Click the icon to view the data for Division D.) (Click the icon to view the data for Division C.) Read the requirement. i Division C - X per unit from the will - Division D X i Requirement - X o S inst Direct materials $ Direct materials Direct labor Variable overhead 18 28 12 Direct labor Variable overhead Requirement Suppose Division C's demand for C82 from the outside market is currently 500.000 units per year. By how much will McFarlane's income decrease if Division D purchases its desired 550.000 units of C82 at $73 per unit from the market rather than from Division C? What transfer price(s) would you suggest to induce both divisions to want Division D to purchase from Division C instead of from the market? Print Done Print Done Print Done

Answer 1

Since there is spare capacity in Division C, the no additional fixed costs will be incurred for making units for Division D. Hence, the relevant cost is variable cost per unit

Loss to company if Division D buys from outside = (58-73)*550,000

= -$8,250,000

i.e. loss

The transfer price should be set between $58 and $73, For any price between these two, Division C will earn on transfer and Division D will save. Hence, both will support transfer

i.e. Transfer price should be greater than C's variable cost of $58 and lower than market price of $73