Question

Division Y has asked Division X of the same company to supply it with 5,200 units of part L763 this year to use in one of its products. Division Y has received a bid from an outside supplier for the parts at a price of $34 per unit. Division X has the capacity to produce 20,800 units of part L763 per year. Division X expects to sell 18,720 units of part L763 to outside customers this year at a price of $35.20 per unit. To fill the order from Division Y, Division X would have to cut back its sales to outside customers. Division X produces part L763 at a variable cost of $26 per unit. The cost of packing and shipping the parts for outside customers is $2 per unit. These packing and shipping costs would not have to be incurred on sales of the parts to Division Y. Required: a. What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 5,200 parts this year from Division X to Division Y? (Round your final answers to 2 decimal places.) Range of transfer prices: < Transfer price < b. Is it in the best interests of the overall company for this transfer to take place? O Yes Ο Νο

Answer 1

Minimum Price will be as follows:

Variable production cost for spare capacity = 2080*26 = $54080

Selling price less cost saved on outside sales cut back = 3120*(35.20-2)= $103,584

Total Price = $157664

Per unit = $30.32 per unit

Maximum price is the quote received from outside.

Hence, the range is

30.32 < Transfer Price < 34

b.Yes, since the income will increase