Question

Clariton Corporation has two divisions, Kissimmee and Grant, and evaluates management on the basis of return on investment. Kissimmee currently makes a part that it sells to both Grant and outsiders. Selected data follow.

Selling price to Grant	$	25
Variable cost		18
Fixed costs		80,000

Kissimmee is seeking an increase in its selling price to $28 per unit because of rising costs. Grant can obtain comparable units from an outside supplier for $26; however, if Grant uses the supplier, Kissimmee will have idle capacity because of an inability to increase sales to outsiders. From the perspective of Clariton Corporation:

Multiple Choice

A. Kissimmee should continue to do business with Grant and charge $28 per unit.

B. Kissimmee should continue to do business with Grant and charge $25 per unit.

C. Kissimmee should continue to do business with Grant because Kissimmee’s variable cost per unit is only $18.

D. Grant should do business with the outside supplier.

E. Grant should split its business between Kissimmee and the outside supplier.

Answer 1

B) Kissimmee should continue to do business with Grant and charge $25 per unit.

If an outside supplier is available the ideal transfer price will be the market price. And here regarding clariton corporation this option will helps to get the item in a lessor cost (25) than outside supplier(26). So from each unit clariton can save 1$.And for this incident there is no need for considering the fixed cost. Because it is an 'out of pocket cost' which is already happened. And fixed cost will never change even clariton buy the item from outside or built inside. So fixed cost is not relevant for decision making.

And this option helps the both selling and buying departments. When considering variable cost only thisthis be beneficial for selling department. And when compared with market prices this option will be better for buying department.