Question

1.Home Products, Inc., is planning the introduction of a new food dryer. To compete effectively, the dryer would have to be priced at no more than $40 per unit. An investment of $600,000 would have to be made in order to produce and sell the new dryer. The company requires a return on investment of at least 25% on new products. Assuming that the company expects to produce and sell 30,000 dryers per year, the target cost per dryer would be closest to:

2.Division C makes a part that it sells to customers outside of the company. Data concerning this part appear below:

Selling price to outside customers	$	75
Variable cost per unit	$	54
Total fixed costs	$	150,000
Capacity in units		10,000

Division D of the same company would like to use the part manufactured by Division C in one of its products. Division D currently purchases a similar part made by an outside company for $79 per unit and would substitute the part made by Division C. Division D requires 1,000 units of the part each period. Division C has ample excess capacity to handle all of Division D’s needs without any increase in fixed costs and without cutting into outside sales. What is the lowest acceptable transfer price from the standpoint of the selling division?

Answer 1

1.given that the company requires a return on investment of 25%

=>$600,000*25%

=>$150,000.

since 30,000 dryers are expected to be sold:

return per unit = $150,000 / 30,000

=>$5 per unit.

the following is the calculation of target cost per dryer:

selling price per unit	$40
less:return per unit	(5)
target cost per unit	$35

2.lowest acceptable transfer price from the stand point of the selling division=$54 per unit.

the minimum transfer price acceptable to selling division will be the varible cost incurred in manufacturing additional unit in this case, since there is ample excess capacity.

so for 1000 units acceptable transfer price = $54 * 1000 units =>$54,000.