Question

Collyer Products Inc. has a Valve Division that manufactures and sells a standard valve as follows:

Capacity in units		130,000
Selling price to outside customers on the intermediate market		$ 17
Variable costs per unit		$ 12
Fixed costs per unit (based on capacity)		$ 9

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 13,000 valves per year from an overseas supplier at a cost of $16 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, if any, for the transfer price between the two divisions?

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?

3. Assume again that the Valve Division is selling all that it can produce to outside customers on the intermediate market. Also assume that $3 in variable expenses can be avoided on transfers within the company, due to reduced selling costs. What is the acceptable range, if any, for the transfer price between the two divisions?

4. Assume the Pump Division needs 25,000 special high-pressure valves per year. The Valve Division's variable costs to manufacture and ship the special valve would be $12 per unit. To produce these special valves, the Valve Division would have to reduce its production and sales of regular valves from 130,000 units per year to 80,000 units per year. As far as the Valve Division is concerned, what is the lowest acceptable transfer price? (Round your answer to 2 decimal places.)

This is the last question in the assignment. To submit, use Alt + S. To access other questions, proceed to the question map button.Next Visit question map

Question 31 of 31 Total31 of 31

Prev

Answer 1

1 when there is idle capacity the acceptable range is transfer prices is Low High Variable cost External price $12 $16 2 When there is external market the acceptable transfer price is variable cost + Contribution margin forgone Selling price - Variable cost = $17-$12 = $5 Contribution per unit forgone (Opportunity cost) Variable cost + Opportunity cost = $12 + $5 = $17 Selling at Variable cost will lead to loss High $17 $17 Low 3 Minimum Transfer price Variable cost - Savings in Internal transfer + Contribution Margin forgone = $12-$3+ $5 Low High $14 $16 4 Lowest acceptable transfer price Variable cost $300,000 25,000*$12 Opportunity cost $250,000 50,000*$5 Total cost $550,000 Total units 25,000 Transfer price $22.00 Answer $550,000/25,000