Question

23.

Fyodor Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers. The company's Machine Division has asked the Parts Division to provide it with 8,400 special parts each year. The special parts would require $33 per unit in variable production costs.

The Machine Division has a bid from an outside supplier for the special parts at $47.40 per unit. In order to have time and space to produce the special part, the Parts Division would have to cut back production of another part-the QR4 that it presently is producing. The QR4 sells for $64 per unit, and requires $32 per unit in variable production costs. Packaging and shipping costs of the QR4 are $2 per unit. Packaging and shipping costs for the new special part would be only $0.50 per unit. The Parts Division is now producing and selling 42,000 units of the QR4 each year. Production and sales of the QR4 would drop by 5% if the new special part is produced for the Machine Division.

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 8,400 special parts per year from the Parts Division to the Machine Division? (Round your final answers to 2 decimal places.)

Answer 1

For parts division profit will increase if
transfer price is more than the variable cost and Opportunity cost (contribution margin lost)
Contribution margin lost	7.5
((64-32-2)*2100)/8400
Sales lost 42000*5%	2100
Minimum transfer price would be
$33+.5+7.5	$41
For Machine division the maximum transfer price would be
the price paid to outstide supplier which is $47.4
Hence the range is
$41<Transfer price<$47.4
If any doubt please comment.