Airflow Inc. produces ceiling fans for home and industrial use. The parts for th

Question

Airflow Inc. produces ceiling fans for home and industrial use. The parts for the different styles of fans ane produced and sold by the Parts Division to the Assembly Division of Airflow Inc. The cost to the Parts Division is $12 per fan. The Assembly Division assembles the purchased parts into finished fans at a cost of $6 per unit and sells the assembled product to an outside wholesaler for $25 per unit. Due to the proprietary technology used to make the Airflow fans operate particularly quietly, the Parts Division is not allowed to sell the parts it produces to external customers. Both divisions have some idle capacity. The managers of both divisions are evaluated based on the profitability of their divisions. Required 1. What is the profit per unit of the two divisions if the transfer price is $15 per unit? Profit per unit Parts Division Assembly Division 2. What is the profit per unit of the two divisions if the transfer price is $12 per unit? Profit per unit Parts Division Assembly Division 3. If the Parts Division operates inefficiently, causing the cost of the parts to rise to $13 per unit, and that cost is used as the transfer price, what is the profit of the two divisions? t per unit Parts Division

Explanation / Answer

1 Profit Per Unit Parts Division: A Transfer Price per unit $15 B Cost per unit $12 C=A-B Profit Per Unit $3 Assembly Division: A Selling price per unit $25 B Transfer price per unit $15 C Assembly cost per unit $6 D=B+C Total cost per unit $21 E=A-D Profit Per Unit $4 Profit per unit Parts Division: $3 Assembly Division: $4 2 Transfer Price $12 per unit Parts Division: A Transfer Price per unit $12 B Cost per unit $12 C=A-B Profit Per Unit $0 Assembly Division: A Selling price per unit $25 B Transfer price per unit $12 C Assembly cost per unit $6 D=B+C Total cost per unit $18 E=A-D Profit Per Unit $7 Profit per unit Parts Division: $0 Assembly Division: $7 3 Parts Division Cost $13per unit Parts Division: A Transfer Price per unit $13 B Cost per unit $13 C=A-B Profit Per Unit $0 Assembly Division: A Selling price per unit $25 B Transfer price per unit $13 C Assembly cost per unit $6 D=B+C Total cost per unit $19 E=A-D Profit Per Unit $6 Profit per unit Parts Division: $0 Assembly Division: $6 4 Disagree Becasuse Assembly division will have reduced profit due to inefficiency of Parts Division 5 Better transfer price from the view ofcompany as a whole Transfer Price $15 Both the divisions make profits and have incentives to perform and increase efficiency

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