Question

Bangles Inc. manufactures and sells engines and lawn mowers. There are two divisions in Bangles Inc., the Dalton and the Green divisions. Small engines are manufactured in the Green Division. These engines are purchased by the Dalton Division but are also sold in the external market. The capacity of the Green Division is 30,000 engines. Dalton division needs 10,000 of the small engines annually. If Green did not sell to Dalton, Green could sell its entire capacity of 30,000 engines in the external market. The following information is available:

                       

                        External market price for one engine:                       $85

                        Variable production cost per engine                          $48

                        Variable marketing cost per engine                           $ 6

                        Fixed cost per engine (based on division capacity)    $12

Dalton can purchase 10,000 engines that it needs from an outside supplier at $80 per engine or it can purchase the Green division (internal transfer).

If Dalton wants to purchase 10,000 engines from Green Division, the minimum acceptable transfer price from the perspective of the selling division (Green) would be:

If half of the variable marketing cost could be avoided by selling to Dalton Division, the minimum acceptable transfer price from the perspective of the selling division would be:

If Green division expanded its plant capacity to 50,000 engines, and the maximum engines that it could sell in the external market remained at 30,000 engines, the minimum acceptable transfer price from the perspective of the selling division would be (assuming half of the variable marketing costs continue to be avoidable on internal transfers):

Assume the situation described in C. Managers of Green and Dalton have agreed to a negotiated transfer price of $67. Further, assume that Dalton had previously been purchasing the engines from an outside supplier at $80 per engine. What is the impact on TOTAL profitability for Bangles Inc if Dalton division buys the 10,000 engines from Green at the agreed transfer price.

Answer 1

aIf Dalton wants to purchase 10,000 engines from Green Division, the minimum acceptable transfer price from the perspective of the selling division (Green) would be: Since, Green Division can sell all its production in external market $85 each and there are no aviodable costs, green division would not accept a price lower than market price b If half of the variable marketing cost could be avoided by selling to Dalton Division, the minimum acceptable transfer price from the perspective of the selling division would be: $85-50% of Variable marketing costs of $6 Since, Green Division can sell all its production in external market @ $85 each and there are aviodable costs of $3, green division can accept a price of $82 ( $85-$3) c If Green division expanded its plant capacity to 50,000 engines, and the maximum engines that it could sell in the external market remained at 30,000 engines, the minimum acceptable transfer price from the perspective of the selling division would be $51 Since Green Division has excess capacity of 20,000 units, it can supply additional unit at it Variable costs ie $51 ( $48+$3) d Saving in Purchases 10,000 x 80 Cost of good Manufactured 10,000 x 51 Net Increase in Profitability of Bangles 80,000 (51,000) 29,000