Transfer Pricing; Decision Making Daniels Inc., which manufactures sports equipment, consists of several operating divisions. Division A has decided to go outside the company to buy materials since division B informed it that the division’s selling price for the same materials would increase to $200. Information for division A and division B follows:
Outside price for materials | $150 |
Division A’s annual purchases | 10,000 units |
Division B’s variable costs per unit | $140 |
Division B’s fixed costs, per year | $1,250,000 |
Division B’s capacity utilization | 100% |
Required
1. Will the company benefit if division A purchases outside the company? Assume that division B cannot sell its materials to outside buyers.
2. Assume that division B can save $200,000 in fixed costs if it does not manufacture the material for division A. Should division A purchase from the outside market?
3. Assume the situation in requirement 1. If the outside market value for the materials drops $20, should A buy from the outside? Explain.
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