Question

Division Y has asked Division X of the same company to supply it with 7,800 units of part L763 this year to use in one of its products. Division Y has received a bid from an outside supplier for the parts at a price of $47 per unit. Division X has the capacity to produce 31,200 units of part L763 per year. Division X expects to sell 28,080 units of part L763 to outside customers this year at a price of $50.80 per unit. To fill the order from Division Y, Division X would have to cut back its sales to outside customers. Division X produces part L763 at a variable cost of $39 per unit. The cost of packing and shipping the parts for outside customers is $2 per unit. These packing and shipping costs would not have to be incurred on sales of the parts to Division Y. 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 7,800 parts this year from Division X to Division Y? (Round your final answers to 2 decimal places.)

b. Is it in the best interests of the overall company for this transfer to take place? Yes No

Answer 1

Answer for a)

The transfer price>variable costs+opportunity cost

Opportunity cost:

(variable cost for lost sales×lost sales)/total transfer

Lost sales is sales which are to be forgo for transfers.

Here with the capacity,they can only produce 3120 units(i.e 31200 units-28080 units) hence they need to forgo 4680 units (I.e 7800units-3120units) to fulfill the transfer.

Opportunity cost:($50.8-$39-$2)×4680 units/7800 units

=$5.88

Transfer price>$39+$5.88=$44.88

Answer for b)

I will say yes as if division Y purchased it from outside supplier he have to pay additionally $2.12($47-$44.88).Hence,if it pruchased from Division X both the division can gain.