Rey Enterprises has just opened a new division(Weatherly). One of their other di
ID: 2476449 • Letter: R
Question
Rey Enterprises has just opened a new division(Weatherly). One of their other divisions (Brinkly) makes a part that could be used in one of Weatherly products. Brinkly info: Production Capacity -100,000 Parts per year, Currently selling 80,000 Parts per year, selling prices $60 per part,Variable costs: Manufacturing$30 per part,Selling$2 per part, Fixed costs$3,000,000 per year. Weatherly Division: Quantity needed 40,000 parts per year.. Price from outside $48 per part. Rey is unwilling to increase capacity. All variable selling costs would be avoided on an intrracompany transfer.
The situation is that Weatherly requires 40000 units of the part, and Brinkly has additional capacity to make only 20000 units. Brinkly is already making and selling 80000 units at a Sale Price of $68.
That Brinkly is able to sell only 80000 units means that, it has additional capacity of 20000 units. For making this additional 20000 units, Brinkly would incur only the variable manufacturing cost of $30. That is the differential costs would be $600,000, as shown below;
A) The maximum price that Weatherly would be willing to pay Brinkly would be $48 per part ie; the price it would pay to the outside supplier.
B) The minimum amount that Brinkly would be willing to charge Weatherly for the 20,000 parts that it can produce additionally and supply, would be the differential cost of manufacturing, when the volume of production is increased to 100000 units. This would be $600,000 for the 20000 units; ie: $30 per unit, which is the variable manufacturing cost of Brinkly. This would ensure that Brinkly will at least be making the same amount of profit; in this case not making more amount of loss, as it was making when it was producing and selling 80000 units.
This is evident from the calculations given below:
As can be seen, at a transfer price of $ 30, Brinkly would be making the same amount of loss at a production of 100,000 units.
(C) If the 20000 parts required by Weatherly, are made internally by Brinkly, Ray enterprises will save $ 360,000 annually.
Amount to be paid for 20000 parts if bought from outside supplier = 20000 * 48 = 960,000
Less: Differential cost to be incurred for producing the parts = 600,000
Overall impact on Rey Enterprises if the parts are manufactured internally = 360,000
This will be the overall situation irrespective of what is charged as the inter-unit (intra firm) transfer price, because when the results are consolidated the income of one is offset by the expense in the other to the same extent.
What should be the ideal transfer price would depend on the circumstances of the case.
Brinkly cannot get $60 per unit for the additional production as the outside market will not absob it. It can at the best get $48, ie the price of the outside supplier. However, this can be reduced by the variable selling expense of $2 per unit which will not be incurred for this additional production.
A reasonable solution can be for both divisions to share the savings resulting form the internal production.
That is the price could be $30 + 50% of (48-30) = $39.
Questions: A) Whats the maximum amount Weatherly would be willing to pay Brinkly?
(B) What's the minimum amountBrinkly would be willing to charge Weatherly?
(C)what's the overall impact (financially) on Rey Enterprises if the parts are made internally?
(D) At what point would it not cost effective for Rey Enterprises to produce the part internally?
Show all calculations to support your answers. Please Please.can you help with Question D: it was missing . thank you,thank you
Volume of Production 80000 Parts Additional 20000 Units For total of 100,000 units Differential Unit Total Unit Total Unit Total Costs COST OF PRODUCTION Variable cost - manufacturing 30.00 2400000 30.00 600000 30.00 3000000 600000 Selling 2.00 160000 0 0 160000 0 Total 32.00 2560000 30.00 600000 3160000 600000 Fixed Cost 37.50 3000000 0 0 3000000 0 TOTAL COST OF PRODUCTION 69.50 5560000 30.00 600000 61.60 6160000 600000Explanation / Answer
D. The internal production of the part will not be cost effective for Ray Enterprises if the Outside rate of the part falls below $30 per pc.
In that case , the cost of purchasing the part from outside is less than $600,000 but the marginal cost of producing additional 20,000 units is $600,000. At this point the internal production of the part will not be cost effective.
Another situation where internal production will not be effectiev is when the differential cost of producing 20,000 units goes beyond $48 per unit due to some increased cost required for additional prodcution. In that case also the marginal cost of production will be more than the cost of outside purchase and the internal production will not be cost effective.
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