Question

I am unsure how to go about solving the problem I'v tried several times to solve it

Crane Company is a multidivisional company. Its managers have full responsibility for profits and complete autonomy to accept or reject transfers from other divisions. Division A produces a subassembly part for which there is a competitive market. Division B currently uses this subassembly for a final product that is sold outside at $2,440. Division A charges Division B market price for the part, which is $1,540 per unit. Variable costs are $1,090 and $1,190 for Divisions A and B, respectively. The manager of Division B feels that Division A should transfer the part at a lower price than market because at market, Division B is unable to make a profit.

Answer 1

Answers

Alternative 1	$ 243,000
Alternative 2	$ 169,992
Alternative 3	$ 286,200

Should transfers be made?

Yes

The division should transfer 540 units at $ 1,090 to $ 1,250.

Calculations:

Particulars	Alternative 1	Alternative 2	Alternative 3
Outside market
Sales	$      831,600	$   1,347,192	$      831,600
Less: variable Cost	$      588,600	$   1,177,200	$      588,600
Contribution	$      243,000	$      169,992	$      243,000
Internal transfer
Sales	$                 -	$                 -	$      631,800
Less: variable Cost	$                 -	$                 -	$      588,600
Contribution	$                 -	$                 -	$        43,200
Total contribution	$      243,000	$      169,992	$      286,200

As no transfer price is given, the average transfer price is taken i.e. (1090+1250)/2 = 1170.

In case of any doubt, please comment.