Weller industries is a decentralized 0 anization with sx divisions The company\'
ID: 2525107 • Letter: W
Question
Weller industries is a decentralized 0 anization with sx divisions The company's Electrica D ison produces a var et of elect Cal items, inc uding a X 2 electrical tting. hetle tr cal (which is operating at capacity) sells this fitting to its regular customers for $13.90 each; the fitting has a variable manufacturing cost of $8.45 The company's Brake Division has asked the Electrical D s on to supp it with a large quantity of X52 tings or on S8 40 each. The Brake D n which pe ting at 60% o capac fitting into a brake unit that it will produce and sell to a large commercial airline manufacturer. The cost of the brake unit being built by the Brake Division follows l ision ut the Purchased parts (from outside vendors) Electrical fitting X52 Other variable costs Fixed overhead and administration Total cost per brake unit S 32.00 8.40 21.10 12.00 S 73.50 Although the $8.40 price for the X52 fitting represents a substantial discount from the regular $13.90 price, the manager of the Brake Division believes that the price concession is necessary if his division is to get the contract for the airplane brake units. He has heard through the grapevine" that the airplane manufacturer plans to reject his bid if it is more than $73.75 per brake unit. Thus, if the Brake Division is forced to pay the regular $13.90 price for the X52 fitting it will either not get the contract or it will suffer a substantial loss at a time when it is already operating at only 60% of capacity The manager of the Brake Division argues that the price concession is imperative to the well-being of both his division and the company as a whole. Weller Industries uses return on investment (ROI) to measure divisional performance Required 1. Assume that you are the manager of the Electrical Division a. What is the minimum transfer price you will charge to supply the X52 fitting to the Brake Division? (Round your answer to 2 decimal places.) Transfer price 2Explanation / Answer
a) Since the percentage of operating capacity of electricity division is not given , we are assuming that it is being operated at 100% capacity. So, the minimum transfer price that will be charged will be equal to external selling price i.e. $13.90 per unit.
b) No we would not recommend the supply of X52 fitting to the brake division for $8.40 per unit because
Loss from transfer at $8.40 : ( $13.90 - $ 8.40 ) = $ 5.50 per unit
Gain to Brake division : ( $73.75 - $ 73.50 ) = $ 0.25 per unit
Increamental Loss = $5.25 per unit
2) Selling price of the brake units: $73.75
Less: Cost of the fittings: $8.40
Less: Variable costs excluding fittig costs: $ 21.10 $29.50
Net positive effect $44.25
3) Since there is no extra capacity the transfer price should be equal to external selling price : $ 13.90
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