San Jose Company operates a Manufacturing Division and an Assembly Division. Bot

Question

San Jose Company operates a Manufacturing Division and an Assembly Division. Both divisions are evaluated as profit centers. Assembly buys components from Manufacturing and assembles them for sale. Manufacturing sells many components to third parties in addition to Assembly. Selected data from the two operations follow:

a For Manufacturing, this is the price to third parties.

b For Assembly, this does not include the transfer price paid to Manufacturing.

Required:

a. Current production levels in Manufacturing are 204,000 units. Assembly requests an additional 44,000 units to produce a special order. What transfer price would you recommend?

b. Suppose Manufacturing is operating at full capacity. What transfer price would you recommend?

c. Suppose Manufacturing is operating at 382,000 units. What transfer price would you recommend? (Round your answer to 2 decimal places.)

Manufacturing Assembly Capacity (units) 404,000 204,000 Sales pricea $ 408 $ 1,320 Variable costsb $ 180 $ 488 Fixed costs $ 40,040,000 $ 24,040,000

Explanation / Answer

a. Optimal Transfer price = $                180.00 When selling division is operating below capacity (including additional units ordered by buying division i.e 2,04,000 units + 44,000 units = 2,48,000 units which is less than total capacity pf 4,04,000 units, then the optimal transfer price is equal to variable cost per unit. b. Optimal Transfer price = $                408.00 When at capacity, for additional units transfer price should be equal to market price (selling price). c. Optimal Transfer price = $                294.00 Capacity =                 4,04,000 Less: Current Production =                 3,82,000 Total Idle Capacity =                     22,000 Additional units =                     44,000 Manufacturing should charge for Variable cost for 22,000 units and Market Price for remaining 22,000 units. Total Based on Variable Cost = $    39,60,000.00 (22,000 X $180) Total based on Market Price = $    89,76,000.00 (22,000 X $408) Total (1) = $ 1,29,36,000.00 Total units produced (2) =                     44,000 Optimal Transfer price (1) / (2) = $                294.00

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