Question

21. Utah Corp. has two divisions: Parts and Assembly. The Parts Division makes Part I2 for sale to outside customers:

Production capacity 24,000 units per month

Demand from outside customers 23,000 units per month

Per unit data for I2 for outside customers:

Selling price	$30.00
Variable production cost	$15.00
Variable selling cost	$0.5
Allocated fixed cost	$1.25

The Assembly Division has designed a new product that also uses Part I2. For its new product, the Assembly Division would need 2,100 units of I2 each month, and the Parts Division would not incur variable selling costs for these units.

(Q.) Assuming the Parts Division would cut back on sales to outside customers in order to supply I2 to the Assembly Division (if necessary), what is the lowest acceptable transfer price from the viewpoint of the selling division? (Do not round intermediate calculations. Round the final numbers to two decimal places.)  

22.

Ren company manufactures 5,000 units of processor chip, A-554, each year for use on its production line. At this level of activity, the cost per unit of processor chip is:

Direct materials $        345

Direct labor 20

Variable manufacturing overhead 8

Fixed manufacturing overhead   80

Total manufacturing cost per unit $ 453

An outside supplier has offered to sell all units of processor chip the company requires. If the company decided to discontinue making processor chip, 65% of the above fixed manufacturing overhead costs could be avoided.

The company could use the facilities presently devoted to the production of processor chip to increase the production of another product by 2,500 units, which would yield an additional contribution margin of $100,000 annually.

(Q.) What is the maximum price the company would be willing to pay the outside supplier for processor chip?

Answer 1

Answer 21:

Transfer price per unit = $ 22.60

Explanation:

Transfer price = Avoidable costs + Contribution lost due to transfer

= (15 * 2,100) + [(30-15.5)*1,100]

= 31,500 + 15,950

= $ 47,450

Transfer price per unit = 47,450 / 2,100

= $ 22.60

Answer 21:

Maximum price = $ 445

Explanation:

Maximum price = Total cost avoided if purchased from outside

= 345 + 20 + 8 + (80 * 65%) + (100,000 / 5,000)

= 345 + 20 + 8 + 52 + 20

= $ 445

In case of any doubt or clarification, feel free to come back via comments.