Question

A firm has two divisions: a UP division and a DOWN division that operate with autonomy. The UP division manufactures two different products, one of which is transferred to the DOWN division within the same company, and the other product is sold externally. The external market price for the latter product is $120 per unit. The transfer price for the internally transferred product is based on its full cost in the UP division plus a markup of 20% over its full cost.

The current total indirect manufacturing costs in the UP division are $120,000, consisting of $40,000 variable overhead and $80,000 fixed overhead. The firm allocates all overhead costs to the products based on their respective direct labor costs (dollars). The current sales quantities and direct costs incurred in the UP division are given in the table below:

	Current Internally Transferred Units	Current Externally Sold Units
Output	1,000	900
Direct labor costs	$20,000	$20,000
Direct material costs	$30,000	$20,000
Marketing costs	-	$5,000

A new external customer offers to buy from the UP division 600 units of a slightly modified version of the externally sold product at a unit price of $90. It is commonly known that the entire industry has idle capacity, which also holds for the UP division. The new order would result in additional direct labor costs of $20,000, additional direct material costs of $17,000 and additional variable overhead costs of $15,000. Total fixed production costs will remain unchanged.

Required:

Calculate the current price used (per unit) when the UP division transfers units to the DOWN division. [ Select ]

Should the offer from the new external customer be accepted from a firm-wide perspective? [ Select ]

If division managers are compensated on the basis of division income, will the UP division accept the offer from the new external customer? [ Select ]

Answer 1

i) The current price used (per unit) when the up devisions transfers units to the down division.

The current price used to transfer units from up divisions is $ 132 per unit.

ii) The offer from the new external customer be accepted from a firm - wide perspective.

This endeavor results in a marginal profit to the company. In order to utilize idle capacity, should be accepted.

iii) the division managers are compensated on the basis of division income will the up division accept the offer from the new external customer.