Forward Ltd has two divisions: Parts Division and Assembly Division. Currently,

Question

Forward Ltd has two divisions: Parts Division and Assembly Division. Currently, Parts Division produces oil filters for commercial vehicles and could only sell 80 percent of its annual capacity of 100,000 units to the external market for a selling price of $8 per unit.
Unit costs of producing the oil filters for the external market are given below:
Variable manufacturing: 2.80$ Fixed manufacturing: 1.30$ Variable selling &administrative: 1.20$ Fixed selling and administrative: 1.80$ Total: 7.10$
Assembly Division requested an internal transfer of 20,000 units from the Parts Division at a transfer price of $5 per unit. This internal transfer could save Parts Division $7,200 of delivery cost. Assume the delivery cost per unit is constant regardless of the units transferred.
Assembly Division could buy the oil filters from an external supplier at $7.80 per unit.
Required:
a] for the internal transfer of 20,000 units of oil filters, determine:
1] minimum and maximum transfer price acceptable to the relevant divisions and explain. 2] impact on the profit of each division and company
Should the internal transfer take place? Explain.
b] if the Assembly Division requested 50,000 units of oil filters instead of 20,000 units at the same transfer price of 5$ per unit, should Parts Division still accept the request? Explain. Forward Ltd has two divisions: Parts Division and Assembly Division. Currently, Parts Division produces oil filters for commercial vehicles and could only sell 80 percent of its annual capacity of 100,000 units to the external market for a selling price of $8 per unit.
Unit costs of producing the oil filters for the external market are given below:
Variable manufacturing: 2.80$ Fixed manufacturing: 1.30$ Variable selling &administrative: 1.20$ Fixed selling and administrative: 1.80$ Total: 7.10$
Assembly Division requested an internal transfer of 20,000 units from the Parts Division at a transfer price of $5 per unit. This internal transfer could save Parts Division $7,200 of delivery cost. Assume the delivery cost per unit is constant regardless of the units transferred.
Assembly Division could buy the oil filters from an external supplier at $7.80 per unit.
Required:
a] for the internal transfer of 20,000 units of oil filters, determine:
1] minimum and maximum transfer price acceptable to the relevant divisions and explain. 2] impact on the profit of each division and company
Should the internal transfer take place? Explain.
b] if the Assembly Division requested 50,000 units of oil filters instead of 20,000 units at the same transfer price of 5$ per unit, should Parts Division still accept the request? Explain.
Unit costs of producing the oil filters for the external market are given below:
Variable manufacturing: 2.80$ Fixed manufacturing: 1.30$ Variable selling &administrative: 1.20$ Fixed selling and administrative: 1.80$ Total: 7.10$
Assembly Division requested an internal transfer of 20,000 units from the Parts Division at a transfer price of $5 per unit. This internal transfer could save Parts Division $7,200 of delivery cost. Assume the delivery cost per unit is constant regardless of the units transferred.
Assembly Division could buy the oil filters from an external supplier at $7.80 per unit.
Required:
a] for the internal transfer of 20,000 units of oil filters, determine:
1] minimum and maximum transfer price acceptable to the relevant divisions and explain. 2] impact on the profit of each division and company
Should the internal transfer take place? Explain.
b] if the Assembly Division requested 50,000 units of oil filters instead of 20,000 units at the same transfer price of 5$ per unit, should Parts Division still accept the request? Explain.

Explanation / Answer

b- No since its capacity is limited to 100000 and by requiring 50000 units @ 5 its fixed cost would not be recovered.

Variable manufacturing 2.8 Fixed manufacturing 1.3 100000 130000 Variable selling & administrative 1.2 Fixed selling & administrative 1.8 100000 180000 Variable Cost(2.8+1.2) 4 units transfer 20000 total variable cost(20000*4) 80000 Less: 7200 of delivery cost -7200 Net Additional outlay 72800 per unit vc for internal transfer 3.64 add: profit markup(8-7.10) 0.9 profit markup on internal transfer as fixed cost is already recovered minimum transfer price 4.54 maximum transfer price 7.8 external market price, that are acceptable to assembly if internal transfer take place at $5 ,(5-3.64 = 1.36) profit per unit in assembly stock parts profit will be higher(1.36*20000) 27200 asembly profit will be lower -27200 for company no impact yes, by internal transfer parts can have 27200 higher profit and assembly is also benefitted by cheaper material cost than market.

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