Question

Division Y has asked Division X of the same company to supply it with 8,000 units of part L763 this year to use in one of its products. Division Y has received a bid from an outside supplier for the parts at a price of $48 per unit. Division X has the capacity to produce 32,000 units of part L763 per year. Division X expects to sell 28,800 units of part L763 to outside customers this year at a price of $52.00 per unit. To fill the order from Division Y, Division X would have to cut back its sales to outside customers. Division X produces part L763 at a variable cost of $40 per unit. The cost of packing and shipping the parts for outside customers is $2 per unit. These packing and shipping costs would not have to be incurred on sales of the parts to Division Y.

Required:

a. What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 8,000 parts this year from Division X to Division Y? (Round your final answers to 2 decimal places.)

Answer 1

Transfer price that would be acceptable by division X

division X will have to lose (8,000-(32,000-28,800)

=4,800 unit of regular sales.

transfer price = loss of contribution margin from regular sales reduction+variable cost for 8,000 units

[($52-$40-$2)*4,800 + $40*8,000] /8,000

$368,000/8,000

=$46

Transfer price>$46

Company Y will not accept transfer price higher than for what its getting from the market.

$48

Transfer price<$48

range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 8,000 parts this

$46<Transfer price<$48

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