A + B Larinore Corporation has a Castings Division that does casting work of var
ID: 2391752 • Letter: A
Question
A + B
Larinore Corporation has a Castings Division that does casting work of various types. The company's Machine Products Division has asked the Castings to provide it with 20,000 special castings each year on a continuing basis. The special castings would require $20 per unit in variable production costs. The Machine Products Division has a bid from an outside supplier of $39 per unit for the castings. In order to have time and space to produce the new castings, the Castings Division would have to cut back production of another casting: the RB4, which it presently is producing. The RB4 sells for $40 per unit, and requires $12 per unit in variable production costs. Boxing and shipping costs of the RBA are $A per unit. Boxing and shipping costs for the new special casting would be only 1 per unit The company is now producing and selling 100 000 units of the RB4 each year. Production and sales of this casting would drop by 20% if the new casting is produced. 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 20,000 castings per year from the Castings Division to the Machine Products Division? (b) Is it in the best interests of Larinore Corporation for this transfer to take place? Explain.Explanation / Answer
a.
From the viewpoint of Casting Division:
The Transfer price should be more than Opportunity cost on lost sales + Additional Cost to make Special Castings
From the viewpoint of the purchasing division
The Transfer price should be less than 39.
Therefore, Range of more than 45 less than 39
So, the range of transfer price does not exist as the managers of both the division is not going to agree to the transfer price.
B. No, The transfer should not take place, from the viewpoint of the company the cost of buying from outside $ 39 is less than the cost of transfer 45. So, if the company buys from outside then it will save profit of $ 6 (45-39).
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Selling price $ 40 Variable Cost $ (12) Shiping Cost $ (4) Opportunity Cost per Unit $ 24
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