Question

A company produces a single product at two locations. Division A produces the product at a...

A company produces a single product at two locations. Division A produces the product at a constant marginal cost of $10 per unit and has additional capacity to spare. Division B is experiencing a significant manufacturing problem and is temporarily not able to produce. As a result, Division B would like to purchase units from Division A to satisfy its local demand, which is defined by the following demand curve: P = 110 - 5Q. As the CFO of the entire company who knows Division A's marginal cost and Division B's demand curve, (1) what transfer price will you set, and (2) at this price, how many units should Division B purchase?

Business   Accounting   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Marginal Cost of Supplying Division (Division A) is $10 per unit, which means Division A is not going to transfer the product at a price which is less than $10 to Division B.

Given Demand curve for Division B is P=110-5Q which means Maximum price that can be paid by Division B is where quantity is 0 units i.e., P = 110. And its Maximum demand is 110/5 = 22 units

(1) As Division A has additional capacity to meet the demand requirements of Division B without foregoing its own demand, optimal transfer price should be the marginal cost for Division A i.e., $10

(2) At this transfer price, Division B should purchase 20 units [(110 - 10) / 5] from Division A.

Note: If you have any doubts or need any clarification, feel free to reach us in comments. Kindly provide the valuable feedback.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Max Ltd. produces kitchen tools, and operates several divisions as investment centers. Division M produces a...
Max Ltd. produces kitchen tools, and operates several divisions as investment centers. Division M produces a product that it sells to other companies for $16 per unit. It is currently operating at its full capacity of 45,000 units per year. Variable manufacturing cost is $9 per unit, and variable marketing cost is $3 per unit. The company wishes to create a new division, Division N, to produce an innovative new tool that requires the use of Division B's product (or...
Materials used by Best Bread Company in producing Division A's product are currently purchased from outside...
Materials used by Best Bread Company in producing Division A's product are currently purchased from outside suppliers at a cost of $30 per unit. However, the same materials are available from Division B. Divison B has unused capacity and can produce the materials by Division A at a variable cost of 20. A) If a transfer price of $25 per unit is established and 60,000 units of material are transfered with no reductions in division B's current sales, how much...
Ballantine Corp. produces and sells expensive bicycles. It has two divisions, A and B: A produces...
Ballantine Corp. produces and sells expensive bicycles. It has two divisions, A and B: A produces the bicycle frame, and division B assembles the rest of the bicycle onto the frame. There is a market for both the frames and the final product. The following data are available for each division: Selling price for final product $280 Long-run average selling price for bicycle frame 160 Incremental cost per unit for completion in division B 170 Incremental cost per unit in...
In the Bombadier Company, Division A has a product that can be sold either to outside...
In the Bombadier Company, Division A has a product that can be sold either to outside customers or to Division B. Information about these divisions is given below: Case 1 Case 2 Division A: Capacity in units 100,000 100,000 Number of units sold externally 100,000 60,000 Market selling price $90 $75 Variable costs per unit 73 58 Fixed costs per unit based on capacity 10 10 Division B: Number of units needed for production 40,000 40,000 Purchase price per unit...
Tulip Company is made up of two divisions: A and B. Division A produces a widget...
Tulip Company is made up of two divisions: A and B. Division A produces a widget that Division B uses in the production of its product. Variable cost per widget is $1.35; full cost is $2.20. Comparable widgets sell on the open market for $2.90 each. Division A can produce up to 2.60 million widgets per year but is currently operating at only 50 percent capacity. Division B expects to use 130,000 widgets in the current year. Required: 1. Determine...
XYZ Corporation has a company with two divisions. Division A manufactures a product that has a...
XYZ Corporation has a company with two divisions. Division A manufactures a product that has a variable cost of $6, sales price to the market of $12 and has a capacity to produce 30,000 units and its fixed costs are $60,000. Current production is 20,000 units. a) 6% - Division B wants to purchase from Division A 5000 units at $7 per unit. Currently it pays $10 per unit to purchase these units from the market. What would you advise...
Yolpin Company has a Components Division which produces parts for product divisions within the company as...
Yolpin Company has a Components Division which produces parts for product divisions within the company as well as for outside manufacturers. The company's Business Products Division has asked the Components Division to provide it with a new part, A12. Production data related to A12 are as follows: Units needed by Business Products Division 20,000 units Variable production cost $25 per unit Allocated fixed production cost $3.50 per unit Unfortunately, producing the new part requires the same production team within the...
The following information concerns two business units within an organization: Division A currently sells its product...
The following information concerns two business units within an organization: Division A currently sells its product to outside parties at a price of $20 per unit. It incurs variable costs of $7 per unit and fixed costs of $50,000 per month. Monthly production is typically 10,000 units, and the division purchases no materials internally.                                 Division B can use the product that Division A produces as a raw material in its operations. If Division B purchases the units from Division...
Oxford Company has two divisions. Thames Division, which has an investment base of $91,900,800, produces and...
Oxford Company has two divisions. Thames Division, which has an investment base of $91,900,800, produces and sells 1,500,500 units of a product at a market price of $150 per unit. Its variable costs total $77 per unit. The division also charges each unit $90 of fixed costs based on a capacity of 1,550,000 units. Lakes Division wants to purchase 305,000 units from Thames. However, it is willing to pay only $184 per unit because it has an opportunity to accept...
Edwards Inc. manufactures electronics. It consists of several divisions operating as profit SBUs. Division A desires...
Edwards Inc. manufactures electronics. It consists of several divisions operating as profit SBUs. Division A desires to purchase materials from Division B at a price of $85 per unit. Division B can produce 25,000 units at full capacity, and is currently operating at 90% capacity, selling only to outside customers at a variable cost of $80 per unit. B's customers pay $115 per unit. Division A pays an outsourced company $110 per unit. If purchased form Division B, B's variable...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT