Question

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

Capacity in units		150,000
Selling price to outside customers on the intermediate market		$ 18
Variable costs per unit		$ 10
Fixed costs per unit (based on capacity)		$ 7

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 15,000 valves per year from an overseas supplier at a cost of $17 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?

Transfer price

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

3. Assume again that the Valve Division is selling all that it can produce to outside customers on the intermediate market. Also assume that $4 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?

Transfer Price

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 $10 per unit. To produce these special valves, the Valve Division would have to reduce its production and sales of regular valves from 150,000 units per year to 90,000 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.)

transfer price

Answer 1

1) If the Valve division have ample capacity, it would charge variable cost of production as minimum cost.It regular sales wont be affected

i.e. $10

Fixed costs are irrelevant as they wont change.

Pump division will accept order only if the price is below $17.(price it pays to outside supplier)

so transfer price would be minimum $10 and maximum $17

2) The valve division will have to forego its current sales so the minimum acceptable price = contribution margin foregone + costs of producing 15,000 valves

($18-10)+$10

=$18

Minimum price $18 for valve division

however pump division will not accept transfer price>$17

so there is no acceptable transfer price possible.

3) in this case transfer price for valve division = $18 (as calculated above) - cost saved

=$18-$4

=$14

Pump division will accept order only if the price is below $17.(price it pays to outside supplier)

So transfer price is $14< transfer price < $17

4) Transfer price for valve division = contribution lost+variable costs

(60,000 units)*($18-$10) + 30,000*$10

=$480,000+$300,000

=$780,000/30,000 units

=$26

minimum acceptable price = $26

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