De lbert Company’s Can Division produces a variety of cans that are used for foo

Question

Delbert Company’s Can Division produces a variety of cans that are used for food processing. Delbert’s Nut Division buys nuts; de-shells, roasts, and salts them; and places them in can. It sells the cans of roasted nuts to various retailers. The most frequently used can is the 12-ounce size. In the past, the Nut Division has purchased these cans from external suppliers for $0.65 each. The manager of the Nut Division has approached the manager of the Can Division and has offered to buy 200,000 12-ounce cans each year. The Can Division currently is producing at capacity and produces and sells 300,000 12-ounce cans to outside customers for $0.65 each.

a) What is the minimum transfer price for the Can Division? What is the maximum range for the Nut Division? Is it important that transfers take place internally? If transfers do take place, what should the transfer price be?

b) Now assume that the Can Division incurs selling costs of $0.04 per can that could be avoided if the cans are sold internally. Identify the minimum transfer price for the Can Division and the maximum transfer price for the Nut Division. Should internal transfer cake place? If so, what is the benefit to the firm as a whole?

c) Suppose you are the manager of the Can Division. Selling costs of $0.04 per can are avoided if the cans are sold internally. Would you accept an offer of $0.63 from the manager of the other division? How much better off (or worse off) would your division be if this price is accepted?

Explanation / Answer

a) Since the Can division is producing at its capacity and all the production is selling in the market at $0.65 each so it can provide to nut Division at $ 0.65 only not less than that because that would cause loss of profit to Can Division. so minimum transfer price Can division can offer is $ 0.65 for each Can.

Maximum range for nut division is 0.65 $ as at this rate it will get in external market so they dont want to pay anything more than that.

It is not importnt because it will not effect profitability of the company as whole so they can have choice to purchase internally or externally.

Transfer price should be $0.65 as below this will lead to loss of profit to Can Division

b) If selling cost can be avoided then Transfer price will be $ 0.65 - $ 0.04 = $ 0.61 each

Minimum Transfer price is $ 0.61 and maximum Trf price is $ 0.65

Yes internal Trf should take process because it would increase the over all profit of company by $ 0.04 X 100,000 = $4,000

c) If selling cost can be avoided then minimum Transfer price will be $ 0.65 - $ 0.04 = $ 0.61 each

If the other division manager offers a price of $ 0.63 then Can division should accept that because it would give them additional profit of $ 0.02 by accepting this deal. better off/profit will increase by $0.02 X 100,000= $2,000

So the offer should be accepted at $ 0.63.

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.