Negotiating a Transfer Price with Excess Capacity The Foundry Division of Findla

Question

Negotiating a Transfer Price with Excess Capacity
The Foundry Division of Findlay Pumps Inc. produces metal parts that are sold to the company's Assembly Division and to outside customers. Operating data for the Foundry Division for 2017 are as follows:

The Assembly Division has just received an offer from an outside supplier to supply parts at $5.15 each. The Foundry Division manager is not willing to meet the $5.15 price. She argues that it costs her $5.35 per part to produce and sell to the Assembly Division, so she would show no profits on the Assembly Division sales. Sales to outside customers are at a maximum, 300,000 parts.

a. Verify the Foundry Division's $5.35 unit cost figure.

Enter answers using two decimal places.

c. Could the Foundry Division meet the $5.15 price and still show a net profit for sales to the Assembly Division? Show computations.

Use a negative sign only to indicate a net loss. Otherwise do not use negative signs with your answers.

To the Assembly
Division
To Outside
Customers

Total *Allocated on the basis of unit sales.
Sales 400,000 parts x $6.50 $2,600,000 300,000 parts x $7.10 $2,130,000 $4,730,000 Variables expenses at $3.60 (1,440,000) (1,080,000) (2,520,000) Contribution margin 1,160,000 1,050,000 2,210,000 Fixed expenses* (700,000) (525,000) (1,225,000) Net income $ 460,000 $ 525,000 $985,000

Explanation / Answer

A. Total cost = 5.35$

Variable cost = 3.6$

Fixed cost per unit(700000/400000)= 1.75$

C.

Selling price 5.15$

Less: VC. (3.60$)

Contribution 1.55$

Less: fixed cost (1.75)

Loss. (0.2)

Therefore the loss is 0.2 $

If the company accepts the order 0.2$ per unit loss will be incurred.

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

---

---

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