Question

Alex Ltd. produces kitchen tools, and operates several divisions as profit centers. Division M produces a...

Alex Ltd. produces kitchen tools, and operates several divisions as profit centers. Division M produces a product that it sells to other companies for $16 per unit. It is currently operating at its full capacity of 45,000 units per year. Variable manufacturing cost is $9 per unit, and variable marketing cost is $3 per unit.

           

            The company wishes to create a new division, Division N, to produce an innovative new tool that requires the use of Division M's product (or one very similar). Division N will product 30,000 units. Currently, Division N can purchase a product equivalent to Division M's from Company X for $15 per unit. However, Alex Ltd. is considering transferring the necessary product from Division M.

           

            Required:                   

            1)   Assume the transfer price is $12 per unit. How would this affect the purchasing costs of Division N? How would this affect the profits of Division M? How would this affect Max Ltd. as a whole?

            2.)   What if the transfer price was $13 per unit?

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Answer #1

Answer to Question 1:

Question 1 Division N: Purchased from outside from Division M Difference $ 4,50,000 3,60,000 90,000 Purchased Cost$ Calculati

Answer to Question 2:

Question 2 Division N: Purchased Purchased from outside from Division M Difference 4,50,000 $ 3,90,000 $ Cost 60,000 Calculat

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