Question

Case Analysis 4: Unit 9 Speed Racer in Victoria makes bicycles for people of all ages. The frames division makes and paints the frames and supplies them to the assembly division where the bicycles are assembled. Speed Racer is a successful and profitable corporation that attributes much of its success to its decentralized operating style. Each division manager is compensated on the basis of division operating income. The assembly division currently acquires all its frames from the frames division. The assembly division manager could purchase similar frames in the market for $480. The frames division is currently operating at 80% of its capacity of 4,000 frames (units) and has the following details: Voltage Regulator Direct materials ($150 per unit x 320 units) $480,000 Direct manufacturing labour ($60 per unit x 3,200 units) 192,000 Variable manufacturing overhead costs ($30 per unit x 96,000 3,200 units) Fixed manufacturing overhead costs $624,000 All the frames division's 3,200 units are currently transferred to the assembly division. No frames are sold in the outside market. The frames division has just received an order for 2,000 units at $450 per frame that would utilize half the capacity of the plant. The order has to be either taken in full or rejected totally. The order is for a slightly different frame than what the frames division currently makes but takes the same amount of manufacturing time. To produce the new frame would require direct materials per unit of $100, direct manufacturing labour per unit of $48, and variable manufacturing overhead costs per unit of $30. Required: 1. From the viewpoint of Speed Racer in Victoria as a whole, should the frames division accept the order for the 2,000 units? 2. What range of transfer prices result in achieving the actions determined to be optimal in question 1 if division managers act in a decentralized manner? 3. The manager of the assembly division has proposed a transfer price for the frames equal to the full cost of the frames including an allocation of overhead costs. The frames division allocates overhead costs to engines on the basis of the total capacity of the plant used to manufacture the frames.

Answer 1

	As Per Given Data The Speed Racer In victoria has 2 Divisions
	1. Frame Division
	2.Assembly Division
	Each Division Manager is compensated on the basis of the Operating Income
	Frame Division operating @ 80%
	Frame Division no Good is sold out side
	Frame Division produce 3200 frames need to be produce all are transferred to assembly division
	Assemble Division can Purchase The frame out side @ $480
	The Full Capaity is 4000 units
WN	Minimum Tp of the Frame Divison
	Final production Mix of totl Available products without internal Transfer - Final production after internal Transfer
	2000 (-)800=1200 UNITS
	Oppurtunity Cost:
	Profit if sold out (2000 units)
	Sale Price	$                            9,00,000.00	(2,000 units*450)
	less:
	Direct material	$                            2,00,000.00	2,000 units*100
	manufacturing labour	$                                96,000.00	2,000 units*48
	variable	$                                60,000.00	2,000 units*30
		$                            5,44,000.00
	Contribution per unit	$                                      272.00
	Oppurtunity Cost	$                            5,44,000.00
	Minimum TP= VC+SFC+OC	*SF- Specific Fixed Cost
			*OC- Oppurtunity Cost
	VC	$                            7,68,000.00	($4,80,000+$1,92,000+$96,000)
	SFC	$                            6,24,000.00
	OC	$                            5,44,000.00
		$                          13,92,000.00
	PER UNIT	$                                      435.00	(1392000/3200 UNITS)
	Minimum Tp of the Frame Divison	$                                      435.00
	Maximum Tp of the Frame Divison	$                                      480.00	( Which will be brought from out side by assembly division)

Speed Victoria
	If 2000 products Accepted	If No out Sale
Sold To out side	$                            9,00,000.00	$                                 -
	( 2000 units $450)
Sold To Internal	$                            8,70,000.00	$           13,92,000.00
	(2000 units @ $435) transferred at the minimum
(A)	1770000	1392000
Costs:
Internal Transfer Variable Cost	$                            4,80,000.00	$              7,68,000.00
	(240 per unit @2000)
Purchased From Out Side	$                            5,76,000.00	$                                 -
	(480 per unit @ 1200 units
Specific Fixed Cost	$                            6,24,000.00	$              6,24,000.00
(B)	1680000	1392000
(A-B)	90,000	-

1. Yes Victoria need to accept as the accepting Provides the Profit of 90,000 even after the units are purchased out side

2.Max -$480 (( Which will be brought from out side by assembly division)

MIN-$435

3.TRANSFER price is

VC given for 3200 units	$                            7,68,000.00
	($4,80,000+$1,92,000+$96,000)
	$                                      $ 240.00	(768000/3200)
FOH	$ 6,24,000	=	$ 156	PER UNIT
	(624000/4000 UNITS)
TP	VC+FOH
	$396.00		(240+156)

3b. yes the value obtained in 3a also suggest for Sale to out side if managers act in decentralized manner

	If 2000 products Accepted	If No out Sale
Sold To out side	$                            9,00,000.00	$                                                       -
	( 2000 units $450)
Sold To Internal	$                            7,92,000.00	$                                  12,67,200.00
	(2000 units @ $396) transferred at the minimum	(3200 units sold @396 price)
(A)	1692000	1267200
Costs:
Internal Transfer Variable Cost	$                            4,80,000.00	$                                    7,68,000.00
	(240 per unit @2000)	(240 per unit @3200)
Purchased From Out Side	$                            5,76,000.00	$                                                       -
	(480 per unit @ 1200 units
Specific Fixed Cost	$                            6,24,000.00	$                                    4,99,200.00
(B)	$                          16,80,000.00	$                                  12,67,200.00
(A-B)	$                                12,000.00	$                                                       -

3c. Advantage of using full cost is internal profits can be eliminated

4A.

If the Assembly division is in a country which has 10% tax on income & Frames Division is in Country where there is no tax on income then the price to be sold is market price which reduce the income of the assembly division & also the frames division is in country which has no tax hence income is not taxed

4B. NO As the internal transfer completely is beneficial hence internal transfer will be accepted by the managers

	If 2000 products Accepted	If No out Sale
Sold To out side	$                            9,00,000.00	$                                                       -
	( 2000 units $450)
Sold To Internal	$                            9,60,000.00	$                                  15,36,000.00
	(2000 units @ $480) transferred at the minimum	(3200 units sold @ 480price)
(A)	1860000	1536000
Costs:
Internal Transfer Variable Cost	$                            4,80,000.00	$                                    7,68,000.00
	(240 per unit @2000)	(240 per unit @3200)
Purchased From Out Side	$                            5,76,000.00	$                                                       -
	(480 per unit @ 1200 units
Specific Fixed Cost	$                            6,24,000.00	$                                    4,99,200.00
(B)	$                          16,80,000.00	$                                  12,67,200.00
(A-B)	$                            1,80,000.00	$                                    2,68,800.00