Please note in respect of Mercury Corporation: a) Mercury already operating at F

Question

Please note in respect of Mercury Corporation:

a) Mercury already operating at FULL capacity. Therefore minimum transfer price depends on external selling price and cost saving on internal sales.

b) you are expected to calculate net loss in contribution margin which is sum of contribution margin lost by Mercury and increased CM by vehicle division.

2. Mercury Corporation manufactures car audio systems. It is a division of Country-Wide Motors, which manufactures vehicles. Mercury sells car audio systems to other divisions of Country-Wide, as well as to other vehicle manufacturers and retail stores. The following information is available for Mercury's standard unit: variable cost per unit $31, fixed cost per unit $23, and selling price to outside customer $85. Country-Wide currently purchases a standard unit from an outside supplier for $80. Because of quality concerns and to ensure a reliable supply, the top management of Country-Wide has ordered Mercury to provide 200,000 units per year at a transfer price of $30 per unit. Mercury is already operat- ing at full capacity. Mercury can avoid $2 per unit of variable selling costs by selling the unit internally. Determine minimum transfer price. (Lo 4) Instructions (a) What is the minimum transfer price that Mercury should accept? (b) What is the potential loss to the corporation as a whole resulting from this forced transfer? (c) How should the company resolve this situation?

Explanation / Answer

a)Minimum transfer price must be greater or equal to marginal costing of transfering division.

Since mercury could save $ 2 as variable selling costs it should be considered while calculating transfer price.

Minimum transfer price would be $31-$2 = $29

b)Contributing lost by mercury = $85-$31 = $54( $2 varable selling expenses to be considered bcoz to make sales to outsiders you should incurr selling expenses)

contribution gain by CM =if it buys from outside it has to buy at 80 but mercury is transferring at $29.The contribution gain = 80-29 = $51

Net loss will be 54-51 = $3*200000 = $600000 dollars.

C) the company should find a supplier who provide quality standard units because of lack quality and reliable supply the company is loosing $3 per unit.

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