Question

QUESTION 4 (10 MARKS] Division G has asked Division F of the same company to supply it with 5,000 units of part WD26 this year to use in one of its products Division G has received a bid from an outside supplier for the parts at a price of R19 00 per unit Division F has the capacity to produce 25,000 units of part WD26 per year Division F expects to sell 21.000 units of part WD26 to outside customers this year at a price of R18 00 per unit to fill the order from Division G, Division F would have to cut back its sales to outside customers Division F produces part WD26 at a variable cost of R12 00 per unit The cost of packing and shipping the parts for outside customers is R2 00 per unit These packing and shipping costs would not have to be incurred on sales of the parts to Division G Required a) What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 5,000 parts this year from Division G to Division F? (7) b) Is it in the best interests of the overall company for this transfer to take place? Explain (3) [10]

Answer 1

Spare capacity = 4,000 units

Relevant cost for these units is equal to the variable cost

= 12*4,000 = $48,000

For 1,000 units = Market price less costs saved

= 1,000*(18-2) = $16,000

Division G will not pay more than the quote received from outside supplier

Hence, profitable range is 64,000 – 95,000

i.e. $12.8 per unit - $19 per unit

B)Yes, since the cost of making is lower than cost of buying from outside