Question

J Thting mum transfer price fuations. P9.44A (LO 6) The Atlantic Company is a multidivisional company. Its managers have full responsi- bility for profits and complete autonomy to accept or reject transfers from other divisions. Division A produces a sub-assembly part for which there is a competitive market. Division B currently uses this sub-assembly for a final product that is sold outside at $2,400. Division A charges division B market price for the part, which is $1,400 per unit. Variable costs are $1,040 and $1,200 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. Instructions a. Calculate division B's contribution margin if transfers are made at the market price, and calculate the company's total contribution margin. b. Assume that division A can sell all its production in the open market. Should division A transfer the goods to division B? If so, at what price? c. Assume that division A can sell in the open market only 500 of the 1,000 units it can month, at $1,400 per unit. Assume also that a 20% reduction in price is necessary to sell all 1,000 units each month. Should transfers be made? If so, how many units should the division transfer and at what price? To support your decision, submit a schedule that compares the contribution margins under three different alternatives. produce every

Answer 1

Part A

	Division A	Division B	Total
Sales	1400	2400	2400
Less: costs
Variable costs	1040	1200	2240
Transfer costs		1400	0
Total costs	1040	2600	2240
Contribution margin	360	(200)	160

Part B

In the given situation, no transfers would be executed as the transfers are based on the market prices less avoidable cost, if any. However, the opportunity cost is referred as the market price.

Part C

Maintain price, no transfers =(500*1400)-(500*1040)=$180000

Cut price, no transfers=(1000*(1400*(1-20%)))-(1000*1040)=$80000

Maintain price and transfers=(500*2400)+(500*1400)-((500*1040)+(500*1200))=$780000

It is advantageous for the company to maintain the current market price for Division A’s product and transfer 500 units to Division B. it is better to decided transfer price within the range of $1040 to $1200 to encourage managers of both divisions to carry out tranfers.