Gutierrez Company makes various electronic products. The company
is divided into a number of autonomous divisions that can either
sell to internal units or sell externally. All divisions are
located in buildings on the same piece of property. The Board
Division has offered the Chip Division $22 per unit to supply it
with chips for 41,000 boards. It has been purchasing these chips
for $23 per unit from outside suppliers. The Chip Division receives
$24.20 per unit for sales made to outside customers on this type of
chip. The variable cost of chips sold externally by the Chip
Division is $13.20. It estimates that it will save $3.20 per chip
of selling expenses on units sold internally to the Board Division.
The Chip Division has no excess capacity.
(a)
Calculate the minimum transfer price that the Chip Division should
accept. (Round answers to 2 decimal places. e.g.
10.25.)
| Minimum transfer price | $ |
Should Chip Division accept the offer?
NoYes
(b)
Suppose that the Chip Division decides to reject the offer. What
are the financial implications for each division, and for the
company as a whole, of this decision?
| Total LostGain in contribution margin by Board Division | $ | |
| Total Gain inLost contribution margin by Chip Division | $ | |
| Overall LostGain in contribution margin for the company | $ |
Solution a:
minimum transfer price that the Chip Division should accept = Selling price to outside customer - saving in selling expense per unit = $24.20 - $3.20 = $21 per chip
Yes, chip division should accept the offer as price offer is higher than minimum transfer price.
Solution b:
Loss of contribution margin by board division = ($23 - $22) * 41000 = $41,000
Loss of contribution margin by chip division = ($22 - $21) * 41000 = $41,000
Overall loss of contribution margin for the company = $82,000
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