Question

ABC Unicycle makes unicycles and has two divisions. Each division is evaluated as a profit center.

The Wheel division produces unicycle wheels and can choose to sell wheels on either the open market at $30 per wheel, or sell them to the Assembly division.

The Assembly division assembles unicycles and can choose to either buy wheels from the Wheel division or purchase wheels on the open market.

              Wheel               Assembly

Cost per unit                                                             Division             Division

Direct Labour                                                            $2.00                  $6.00

Variable Materials                                                  3.00                     7.00

Variable Overhead Costs                                       4.00                      8.00

Fixed Overhead Costs                                            5.00                      9.00

Other information

Maximum capacity                                                 2,000                  3,000

Current production volume                                 1,800                  2,600

The Assembly division would like to purchase an additional wheels from the Wheel division. Wheel division fixed costs would not be affected by additional sales to the Assembly Division.

Required:

1. What are the minimum and maximum transfer prices between the Wheel Division and Assembly Division if the Wheel Division would like to buy one additional wheel.
2. What are the minimum and maximum transfer prices between the Wheel Division and Assembly Division if the Wheel Division would like to buy 500 additional wheels.

Answer 1