Question

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

Capacity in units		200,000
Selling price to outside customers on the intermediate market		$ 21
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 20,000 valves per year from an overseas supplier at a cost of $20 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 $2 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 30,000 special high-pressure valves per year. The Valve Division's variable costs to manufacture and ship the special valve would be $11 per unit. To produce these special valves, the Valve Division would have to reduce its production and sales of regular valves from 200,000 units per year to 150,000 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.)

Answer 1

Req 1.

Where the Valve division is having a sufficient idle capacity to produce the valve for Pump division, then the minimum acceptable transfer price for Valve division is $12 per unit i.e. variable cost per unit of producing the valve for the Pump Division.

However, maximum price shall be the price which the Pump division is already paying to outside supplier i.e. $20 per unit.

Therefore, acceptable range is:

Minimum $ 12.00 transfer price to $ 20.00 maximum.

Reqb.

Where the Valve division is not having a sufficient idle capacity to produce the valve for Pump division, then the minimum acceptable transfer price for Valve division is $21 per unit i.e. sum total of variable cost per unit of producing the valve for the Pump Division i.e. $12 per unit and Loss of contribution from sale to regular customer i.e. $9.00 (21-12).

However, maximum price shall be the price which the Pump division is already paying to outside supplier i.e. $20 per unit.

Therefore, as the minimum price is more than maximum price, there is no acceptable range exist for the transfer price.

Reqc.

Where the Valve division is not having a sufficient idle capacity to produce the valve for Pump division, then the minimum acceptable transfer price for Valve division is $19 per unit i.e. sum total of variable cost per unit of producing the valve for the Pump Division i.e. $10 per unit (12-2) and Loss of contribution from sale to regular customer i.e. $9.00 (21-12).

However, maximum price shall be the price which the Pump division is already paying to outside supplier i.e. $20 per unit.

Therefore, acceptable range is:

Minimum $ 19.00 transfer price to $ 20.00 maximum.

Req d.

Where the Valve division is not having a sufficient idle capacity to produce the valve for Pump division, then the minimum acceptable transfer price for Valve division is the sum total of variable cost per unit of producing the valve for the Pump Division and Loss of contribution from sale to regular customer. Thus, minimum price is computed as under:

Contribution margin earned per unit by Valve (21-12)	9
Multiply: Loss of sale units			50,000
Total Loss of contribution			4,50,000
Divide: Total units supplied to Pump Division	30,000
Loss of contribution per unit charged from Pump	15
Add: Variable cost per unit of producing the valve	11
Lowest acceptable transfer price per Valve Division	26