Question

The Electronics Division of Far North Telecom, Ltd., of Canada manufactures an electrical switching unit that can be sold either to outside customers or to the Fiber Optics Division of Far North Telecom. Selected operating data on the two divisions are given below:

Electronics Division

Unit selling price to outside customers 80

Variable production cost per unit 52

Variable selling and administrative   

Expense per unit 9

Fixed production cost in total 300,000*

Fiber Optics Division:

Outside purchase price per unit (before any quantity discount) 80

*Capacity 25, 000 units per year.

The Fiber Optics Division now purchases the switch from an outside supplier at the regular $80 intermediate price less a 5% quantity discount. Since the switch manufactured by the Electronics Division is of the same quality and type used by the Fiber Optics Division, consideration is being given to buying internally rather than from the outside supplier. As the company's president stated, "It's just plain smart to buy and sell within the corporate family."

A study has determined that the variable selling and administrative expenses of the Electronics Division would be cut by one-third for any sales to the Fiber Optics Division. Top management wants to treat each division as an autonomous unit with independent profit responsibility.

1.Assume that the Electronics Division is currently selling only 20,000 units per year to outside customers and that the Fiber Optics Division needs 5,000 units per year.

c.Assume that the Fiber Optics Division finds an outside supplier that will sell the electrical unit for only $65 per unit. Should the Electronics Division be required to meet this price? Explain.

Answer 1

Electronic division is having an excess spare capacity of 5000 units.
For which the Fiber division has a demand.
Therefore, minimum transfer price for Electronic division is a cost at which these additional unit can be produced i.e. Variable cocst per unit.
Minimum transfer price:
Variable Production cost			52
Variable Selling admin Expense (9/3)			3
Minimum transfer price:			55
Therefore, the Electronic division is required to meet the demand for a price at or below $ 65.