P9-41A Zapp Manufacturing Company makes various electronic products. The company
ID: 2543171 • Letter: P
Question
P9-41A Zapp Manufacturing Company makes various electronic products. The company is divided into autonomous divi- (SO 6) sions that can either sell to internal units or sell externally. All divisions are located in buildings on the same piece of property. Determine the The board division has offered the chip division $20 per unit to supply it with chips for 30,000 boards. It has been purchas- minimum transfer ing these chips for $22 per unit from outside suppliers. The chip division receives $22.50 per unit for sales made to outside price with no excess customers on this type of chip. The variable cost of chips sold externally by the chip division is $14.50. It estimates that it will capacity save $4.50 per unit in selling expenses on units sold internally to the board division. The chip division has no excess capacity Instructions (a) Calculate the minimum transfer price that the chip division should accept. Discuss whether it is in the chip division's best interest to accept the offer. (b) Suppose that the chip division decides to reject the offer, What are the financial consequences for each division, and (b) Total loss to compan for the company as a whole, of this decision? $120,000Explanation / Answer
Solution a:
Regular selling price of chip division = $22.50
Saving in variable selling expenses if chips are sold internally to board division = $4.50
Hence minimum transfer price that chip division should accept = $22.50 - $4.50 = $18 per unit
As price offered by board division is $20 per chip which is higher than minimum acceptable transfer price hence this is in the chip division's best interest to accept the offer.
Solution B:
If chips division rejects the offer, then
Loss to chip division = ($20 - $18) * 30000 = $60,000
If chip division reject then board division will buy the chips from outside market at $22 per unit
Hence loss to board division = ($22 - $20) * 30000 = $60,000
Total loss for the company as a whole = $60,000 + $60,000 = $120,000
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