Question

Shasta sion earned SI,110,000. THIS JU in value at the rate of 16 percent per year over the $65.000 Required: Advise Lawanna on the relative merits of the Shasta offer rubio 100 OBJECTIVES divisions. One division, ised by the other five. hers; however, from The current policy decided to investigate Problem 10.28 Setting Transfer Prices-Market Price versus Full Cost Ardmore, Inc., manufactures heating and air conditioning units in its six divisions the Components Division, produces electronic components that can be used by the All the components produced by this division can be sold to outside customers; howe the beginning, about 70 percent of its output has been used internally. The cur requires that all internal transfers of components be transferred at full cost. Recently, Cynthia Busby, the new chief executive officer of Ardmore, decided to inval the transfer pricing policy. She was concerned that the current method of pricing interna es might force decisions by divisional managers that would be suboptimal for the firm Ad of her inquiry, she gathered some information concerning Part 4CM, used by the Small Ac Division in its production of a window air conditioner, Model 7AC. The Small AC Division sells 10,000 units of Model 7AC each year at a unit price of SSR Given current market conditions, this is the maximum price that the division can charge for Model 7AC. The cost of manufacturing the air conditioner is computed as follows: Part 4CM Direct materials $ 6.45 Direct labor 23.00 Variable overhead 15.00 3.50 6.50 S54.45 possible. Fixed overhead Total unit cost blobo The window unit is produced efficiently, and no further reduction in manufacturing costs The manager of the Components Division indicated that he could sell 10.000 units the Sion's capacity for this part) of Part 4CM to outside buyers at S12 per unit. The

Answer 1

1. Contribution of part 4CM = (Sales - variable costs) * No of units= [6.45 - ( 6.45 - 1.8)] *10,000 = 18,000

Contribution of model 7AC = (Sales - variable costs) * No of units= [58 - ( 54.45 - 6.5)] *10,000 = 100,500

Firm wide contribution = 18000 +100,500 = 118,500

2. Minimum transfer price =$12

Maximum transfer price = $12

3. Unless the small AC division is able to increase the price of the Model 7AC ,the manager will discontinue the production and will not purchase any of the components. The cost of producing the AC will increase from $54.45 to $60.45.

4. No of units sold = 10,000