Question

Question 1 Waterway Inc. has two divisions. Division A makes and sells student desks. Division B manufactures and sells reading lamps. Each desk has a reading lamp as one of its components. Division A can purchase reading lamps at a cost of $10 from an outside vendor. Division A needs 10,500 lamps for the coming year. Division B has the capacity to manufacture 48,800 lamps annually. Sales to outside customers are estimated at 38,300 lamps for the next year. Reading lamps are sold at $12 each. Variable costs are $7 per lamp and include $1 of variable sales costs that are not incurred if lamps are sold internally to Division A. The total amount of fixed costs for Division B is $87,800. Consider the following independent situations. What should be the minimum transfer price accepted by Division B for the 10,500 lamps and the maximum transfer price paid by Division A? Minimum transfer price accepted by Division B per unit Maximum transfer price paid by Division A per unit Suppose Division B could use the excess capacity to produce and sell externally 14,000 units of a new product at a price of $8 per unit. The variable cost for this new product is $5 per unit. What should be the minimum transfer price accepted by Division B for the 10,500 lamps and the maximum transfer price paid by Division A? Minimum transfer price accepted by Division B e per unit Maximum transfer price paid by Division A per unit If Division A needs 17,500 lamps instead of 10,500 during the next year, what should be the minimum transfer price accepted by Division B and the maximum transfer price paid by Division A? (Round answers to 2 decimal places, e.g. 10.50.) Minimum transfer price accepted by Division B e per unit Maximum transfer price paid by Division A per unit Click if you would like to Show Work for this question: Open Show Work

Answer 1

Minimum transfer price accepted by Division B [6-1]	6	per unit
Minimum transfer price accepted by Division A	10	per unit

Minimum transfer price accepted by Division B [7-1+4]	10	per unit
Minimum transfer price accepted by Division A	10	per unit

Minimum transfer price accepted by Division B [7-1+2]	8	per unit
Minimum transfer price accepted by Division A	10	per unit

Workings:

Contribution	3	[8-5]
External units	14000
Required contribution	42000
Units to be transferred internally	10500
Opportunity cost per unit	4.00	[42000/10500]

Contribution	5	[12-7]
Production capacity	48800
Less: External capacity	38300
Free capacity	10500
Required units	17500
Loss of sales	7000
Loss of contribution	35000
Opportunity cost per unit	2	[35000/17500]