Question

Q#1.

Division A, which is operating at capacity, produces a component that it currently sells in a competitive market for $23 per unit. At the current level of production, the fixed cost of producing this component is $8 per unit and the variable cost is $10 per unit. Division B would like to purchase this component from Division A. The price that Division A should charge Division B for this component is :

a. $10 per unit

b. $18 per unit

c. $23 per unit

d. $25 per unit

e. 35 per unit

Q#2.

A company has two divisions, X and Y each operated as an investment center. X charges Y $55 per unit for each unit transferred to Y. Other data are:

X's variable cost per unit	$40
X's fixed costs	$100.000
X's annual sales to Y	5,000	units
X's sales to outsiders	10,000	units

X is planning to raise its transfer price to $65 per unit. Division Y can purchase units at $50 each from outsiders, but doing so would idle X’s facilities now committed to producing units for Y. Division X cannot increase its les to outsiders. From the perspective of the short-term profit position of the company as a whole, from whom should division Y acquire the units?

a. Outside vendors

b. Division X, but only at the variable cost per unit

c. Division X, but only until fixed costs are covered, then should purchase from outside vendors

d. Division X, in spite of the increased transfer price

e. It is not possible to tell without additional information

Thank you so much!

Answer 1

Q#1

Division A should charge Division B $23 per unit, as Division A is operating at full capacity and also there is demand in a competitive market at $23 per unit. Price lower than this is detrimental to the profit of Division B. The answer would have been different if there was idle capacity, in which case Division A could have sold to Division B at Variable Cost.

Q#2

The answer is d. Division X, in spite of the increased transfer price. This is Interdepartmental transfer and the profit of the company has whole will not be impacted as pofits of both departments roll up to the company. If Division Y buys from outisders it will result in excess capacity in Division X and is a loss to the company.