Question

Hill Manufacturing is a large manufacturer that produces diesel engines. The company has several large divisions and the managerial accountant reported that the Engine Division could produce part V1 which will be used by the Assembly Division to produce aircraft engines. Alternatively, the Assembly Division could purchase the part from an outside supplier. The Engine Division has excess capacity and could produce the part in that department. The variable selling expenses and manufacturing costs related to the production of this part by the Engine Division include the following:

            Direct materials $875

            Direct labor    $125

            Variable manufacturing overhead    $140

            Fixed manufacturing overhead (current production level) $200

            Variable selling expenses (only incurred on sales to outside customers)   $130

The current market price of part V1 is $1,500. The company’s uses a negotiated transfer price policy.

1. What is the lowest price the Engine Division should accept to produce and sell part V1 to the Assembly Division?
2. What is the highest price the Assembly Division should be willing to pay the Engine Division for part V1?

Answer 1