Question

Collyer Products Inc. has a Valve Division that manufactures and sells a standard valve as follows: Check my work 00 5411 Capacity in units Selling price to outside customers on the internediate market Variable costs per unit Fixed costs per unit (based on capacity) 230,000 $ 16 $ 10 $ 7 Print The company has a Pump Division that could use this valve in the manufacture of one of its pumps. The Pump Division is currently purchasing 20,000 valves per year from an overseas supplier at a cost of $15 per valve. 1. Assume that the Valve Division has ample idle capacity to handle all of the Pump Division's needs. What is the acceptable range, any, for the transfer price between the two divisions? S 108 Transfer price $ 15 2. Assume that the Valve Division is selling all that it can produce to outside customers on the intermediate market. What is the acceptable range, if any, for the transfer price between the two divisions? Transfer price

Answer 1

1. Minimum Transfer Price (determined by supplying division)

= Marginal Cost + Any Additional Incidental costs + Opportunity Cost *

* Opportunity Costs is the benefit that is foregone from selling internally rather than externally

2. Maximum Transfer Price (determined by purchasing division)

= Lower of

(i) Net Marginal revenue

(ii) External Buy in price

Net Marginal Revenue = Marginal Revenue (i.e, Selling price) - Marginal cost to purchasing division

Answer :

1. In this case Valve division has ample idle capacity to fulfill the needs of the Pump Division. There is no Opportunity cost loss to the valve division in this case.

Minimum Transfer Price = Marginal Cost + Any Additional Incidental costs + Opportunity Cost

= 10+0+0 = 10

Maximum Transfer price is that the pump division will pay to external supplier = 15

Acceptable Range = 10 - 15

2. In this case Valve division has no idle capacity to fulfill the needs of the Pump Division. Valve division has to curtail external sales to supply to the pump division. So, Opportunity cost id to be considered here i.e., Contribution

A)Minimum Transfer Price = 10+0+6* = 16

*Contribution = Selling price - Variable cost = 16-10 = 6

B)Maximum Transfer price is that the pump division will pay to the external supplier = 15

Since Valve division can sell to the external Market at 16$, it will not transfer below that price, and the pump division can purchase in the outside market at 15$ it will not pay above that price.

So, in this case, the transfer will not happen. No acceptable range of prices

3. In this case Valve division has no idle capacity to fulfill the needs of the Pump Division. Valve division has to curtail external sales to supply to the pump division. So, Opportunity cost id to be considered here i.e., Contribution and it can also consider the reduced selling expenses due to internal sales

A)Minimum Transfer Price = 10+0+6* = 16 - 3 = 13

*Contribution = Selling price - Variable cost = 16-10 = 6

B)Maximum Transfer price is that the pump division will pay to the external supplier = 15

Acceptable Range = 13 - 15

4. Lowest Transfer price = Variable cost + Opportunity cost = 11+12 = 23

Opportunity cost = (230000-180000)* 6 / 25000 = 12

(Hope you will understand this please give your valuable feedback)