ezto.mheducation.com/hm.tpx Check Your Work FWKA 6201 2019-201843.2 Watch Keepin
ID: 2333442 • Letter: E
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ezto.mheducation.com/hm.tpx Check Your Work FWKA 6201 2019-201843.2 Watch Keeping Up with the K Collyer Products Inc. has a Valve Division that manufactures and sels a standard valve as follows Capacity in units Fixed costs per unit (based on capacity) The company has a Pump Division that could use this valve in the manufacture of one of its pumps. The Selling price to outside customers on the intermediate market Variable costs per unit 220,000 $ 23 $ 15 S 12 Division is currently purchasing 22,000 valves per year from an overseas supplier at a cost of $22 per Required: 1. Assume that the Valve Division has ample idle capacity to handle all of the Pump Division's needs. What is the acceptable range, if any, for the transfer price between the two divisions? Answer is complete but not entirely correct. 15 s 15 2. Assume that the Valve Division is selling all that it can produce to outside customers on the intermediate market. What is the acceptable range, if any, for the transfer price between the two divisions? Answer is complete but not entirely correct. s 23 3. Assume again that the Valve Division is selling all that it can produce to outside customers on the intermediate market. Also assume that $2 in variable expenses can be avoided on transfers within the company, due to reduced selling costs. What is the acceptable range, if any, for the transfer price between the two divisions? 3 Answer is complete but not entirely correct.Explanation / Answer
Solution 1:
As valve division is having idle capacity to handle pump division requirement therefore
minimum acceptable transfer price of valve division = Variable cost per unit = $15
Maximum acceptable transfer price for pump division = Purchase price from overseas supplier = $22
Range of acceptable transfer prices:
$15 <= Transfer Price <= $22
Solution 2:
As valve division is selling all it can product to outside customer therefore
minimum acceptable transfer price of valve division = Selling price per unit to outside customer = $23
Maximum acceptable transfer price for pump division = Purchase price from overseas supplier = $22
As minium acceptable transfer price of Valve division is higher than maximum acceptable transfer price of Pump division, therefore range of acceptable transfer prices could not be established.
Solution 3:
As valve division is selling all it can product to outside customer therefore
minimum acceptable transfer price of valve division = Selling price per unit to outside customer - avoidable variable cost per unit = $23 - $2 = $21
Maximum acceptable transfer price for pump division = Purchase price from overseas supplier = $22
Range of acceptable transfer prices:
$21 <= Transfer Price <= $22
Solution 4:
Contribution margin per unit from regular valve = $23 - $15 = $8 per unit
Total loss of contribution margin due to decrease in production = (220000 - 170000) * $8 = $400,000
Variable cost to produce high pressure valve = 32000 * $14 = $448,000
Minimum acceptable transfer price of high pressure valve for valve division = Variable cost to manufacture + Loss of contribution margin = $448,000 + $400,000 = $848,000
Lowest acceptable transfer price per unit = $848,000 / 32000 = $26.50 per valve.
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