Question

Waterway Wizard is a publishing company with a number of different book lines. Each line has contracts with a number of different authors. The company also owns a printing operation called Quick Press. The book lines and the printing operation each operate as a separate profit center. The printing operation cars revenue by printing books by authors under contract with the book lines owned by Waterway Wizard, as well as authors under contract with other companies. The printing operation bils out at $0.01 per page, and a typical book requires 390 pages of print. A manager from Business Books, one of the Waterway Wizard's book lines, has approached the manager of the printing operation offering to pay $0.006 per page for 1.400 copies of a 390-page book. The bookline pays outside printers $0.00 per page. The printing operation's variable cost per page is $0.003 Determine whether the printing should be done internally or externally, and the appropriate transfer price, under each of the following situations. Assume that the printing operation is booked solid for the next 2 years, and it would have to cancel an obligation with an outside customer in order to meet the needs of the internal division. (Round Printing should be done Minimum Dansfer price Cudy Assume that the printing operation has available capacity. (Round Transfer price to 3 decimal places, e... 0.189.) Printing should be done Minimum transfer price $ Calculate the change in contribution margin to each division, and to the company as a whole, if too management forces the printing operation to accept the 50.006 per page transfer price when it has no available capacity to the printing operations to the business books 5 to the company $

Answer 1

(a)      Assuming no available capacity, the printing operation’s variable cost is $0.003 per page and its opportunity cost is $0.007 ($0.01 – $0.003) per page. The minimum transfer price would be $0.01 ($0.003 + $0.007). Therefore, the printing operation would not accept the internal transfer price of $0.006.

(b)      Assuming that the printing operation has available capacity, the printing operation’s variable cost is $0.003 and its opportunity cost is $0. The minimum transfer price would be $0.003 ($0.003 + $0). Therefore, in this case, the printing operation should accept the offer to print internally. The $0.006 transfer price would provide a contribution margin of $0.003 ($0.006 – $0.003) per page. Depending on its bargaining strength, the printing operation might want to ask for a transfer price higher than $0.006, since the company is saving money at any price below the $0.008 price that the line pays to outside printers.

(c)  

The printing operation would lose:

                    ($0.01 – $0.006) X 390 pages X 1,400 copies                             =   ($2,184)

          Business Books would save:

                    ($0.008 – $0.006) X 390 pages X 1,400 copies                           =     1,092

          Overall loss to the company as a whole                                                 =   ($ 1092)