Question

TB Problem Qu. 11A-96 Division Y has asked Division X of the...

Division Y has asked Division X of the same company to supply it with 6,000 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 $38 per unit. Division X has the capacity to produce 24,000 units of part L763 per year. Division X expects to sell 21,600 units of part L763 to outside customers this year at a price of $40.00 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 $30 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 6,000 parts this year from Division X to Division Y? (Round your final answers to 2 decimal places.)

b. Is it in the best interests of the overall company for this transfer to take place?

• Yes

• No

Answer 1

a

Transfer Price as per Divison Y

Transfer price > Variable cost + Opportunity cost

Variable Cost = 30

Opportunity cost = (40 - 30 - 2) x 3,600/6,000

=4.8

Therefore, Transfer price > $30.00 per unit + $4.80 per unit = $34.80 per unit.

Transfer Price as Per Divison X

Transfer price < $38.00.

So the range is

$34.80 < Transfer price < $38.00.

b.

Yes the transfer Should take Place its in the best interest of the company. The cost of transferring units within the company is 34.8 however if purchased from outside the price is 38. The Overall profit for the Company is increased by 3.2 Per unit if transferred within the Company