Question

Munoz Radio Corporation is a subsidiary of Salem Companies. Munoz makes car radios that it sells to retail outlets. It purchases speakers for the radios from outside suppliers for $41 each. Recently, Salem acquired the Jordan Speaker Corporation, which makes car radio speakers that it sells to manufacturers. Jordan produces and sells approximately 330,000 speakers per year, which represents 70 percent of its operating capacity. At the present volume of activity, each speaker costs $33 to produce. This cost consists of a $19 variable cost component and an $14 fixed cost component. Jordan sells the speakers for $43 each. The managers of Munoz and Jordan have been asked to consider using Jordan's excess capacity to supply Munoz with some of the speakers that it currently purchases from unrelated companies. Both managers are evaluated based on return on investment. Jordan's manager suggests that the speakers be supplied at a transfer price of $43 each (the current selling price). On the other hand, Munoz’s manager suggests a $41 transfer price, noting that this amount covers total cost and provides Jordan a healthy contribution margin. Required a. Based on market prices suggested by the managers, which transfer price would you recommend? Transfer price

Answer 1

Jordan sells to Given that : The case suggests two market prices, one is $41 each which is the poice at which munoz purchases from outside supplies and $41 which is the point at which out side supplicos. The price recommended is $41 as at this poice the cost is completly covered along with providing enough contr- ibution margin. excess capacity with Jordan, the cost to produce extra units only be variable cost. These fore, $ 41 is the recommended price as it covers cost as provides sufficiente contribution margin. Since there is will Well AISO, since Munoz can purchase from outside at $41, it Nould accept a higher internal transfer price of $43.