Question

Negotiating a Transfer Price with Excess Capacity The Foundry Division of Findlay Pumps Inc. produces metal...

Negotiating a Transfer Price with Excess Capacity
The Foundry Division of Findlay Pumps Inc. produces metal parts that are sold to the company's Assembly Division and to outside customers. Operating data for the Foundry Division for 2017 are as follows:

To the Assembly
Division

To Outside
Customers

Total
*Allocated on the basis of unit sales.
Sales
400,000 parts x \$8.25 \$3,300,000
300,000 parts x \$8.60 \$2,580,000 \$5,880,000
Variables expenses at \$5.00 (2,000,000) (1,500,000) (3,500,000)
Contribution margin 1,300,000 1,080,000 2,380,000
Fixed expenses* (700,000) (525,000) (1,225,000)
Net income \$ 600,000 \$ 555,000 \$1,155,000

The Assembly Division has just received an offer from an outside supplier to supply parts at \$6.53 each. The Foundry Division manager is not willing to meet the \$6.53 price. She argues that it costs her \$6.75 per part to produce and sell to the Assembly Division, so she would show no profits on the Assembly Division sales. Sales to outside customers are at a maximum, 300,000 parts.

a. Verify the Foundry Division's \$6.75 unit cost figure.

Enter answers using two decimal places.

c. Could the Foundry Division meet the \$6.53 price and still show a net profit for sales to the Assembly Division? Show computations.

Use a negative sign only to indicate a net loss. Otherwise do not use negative signs with your answers.

Sales to Assembly Division at \$6.53 price

SOLUTION

A. Calculation of unit cost of Foundry division-

 Particulars Amount (\$) Variable cost 5 Fixed costs (\$1,225,000 / 700,000) 1.75 Total unit cost 6.75

Thus, the total unit cost of Foundry division is \$6.75

Note- Number of parts sold = To assembly division + To outside supplier

= 400,000 + 300,000 = 700,000 parts

B.

 Particulars Amount (\$) Sales (400,000 * \$6.53) 2,612,000 Less: Variable costs (400,000 * \$5) 2,000,000 Contribution margin 612,000 Less: Fixed expenses (400,000 * \$1.75) 700,000 Net profit / (Loss) (88,000)

Thus, the net loss for sales to assembly division at \$6.53 price is \$88,000