5 Case 11A-7 Transfer Pricing: Divisional Performance[LO11-5) 10 points Weller I

Question

5 Case 11A-7 Transfer Pricing: Divisional Performance[LO11-5) 10 points Weller Industries is a decentralized organization with six divisions. The company's Electrical Division produces a variety of electrical tems, Including an X52 electrica ng. The Electrical Division (which is operating at capacity) sells this fitting to its regular customers for $14.30 each; the fitting has a variable manufacturing cost of $8.75 The company's Brake Division has asked the Electrical Division to supply it with a large quantity of X52 fittings for only $9.00 each. The Brake Division, which is operating at 60% of capacity, will put the fitting into a brake unit that it will produce and sell to . 8ook a large commercial airline manufacturer. The cost of the brake unit being built by the Brake Division follows Purchased parts (from outside vendors) Electrical fitting X52 Other variable costs Fixed overhead and administration $ 35.8e 9.99 20.60 11.80 Print References Total cost per brake unit $ 75.60 Although the $9.00 price for the X52 fitting represents a substantial discount from the regular $14.30 price, the manager of the Brake Division believes 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 $75.85 per brake unit. Thus if the Brake Division is forced to pay the regular $14.30 price for the X52 fitting, it will elther 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 ls 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 lowest acceptable transfer price for the Electrical Division? b. Would you supply the X52 fitting to the Brake Division for $9.00 each as requested? 2. Calculate the net positive effect on the company's profit per brake unit the Electrical Division to supply the fittings to the Brake Division and if the airplane brakes can be sold for $75.85? 3. In principle, within what range would that transfer price lie? (For all requirements, enter your "Financial Disadvantage" amounts as a negative value and round your final answers to 2 decimal places.) 1a Lowest acceptable transfer price 1b 2. Financial advantage (disadvantage) on a per unit basis 3. Highest acceptable transfer price Would you supply the X52 fitting to the Brake Division for $9.00 ach as r sted? Reference links endix 11A: Review oblem: Transfer

Explanation / Answer

1. The Lowest Transfer Price should be greater than the Variable Cost Per unit and Contribution Margin lost on Units Transferred. In this senario Since there is a spare capacity assuming no contribution margin lost, So the Minimum Transfer Price is the Variable cost per unit i.e., 8.75 Per unit

Lowest Transfer Price >= Variable Cost Per unit +Total Contribution margin lost on Sales/No. of Units Transferred

2. Since the $9 Price is above the $8.75 Lowest Transfer Pricing Cost, as a Manager of this division i would accept the offer assuimg that i have enough spare capacity

3.The Variable cost of the break unit from the company prespective would be as follows

Purchased parts from outside : 35.00

Electrical fitting X52                : 08.75

Other Variable Costs              : 20.60

Total Variabel Costs               : 64.35

Selling Price to Aircraft          : 75.85

Margin Per Piece                   : 11.50

Margin lost in Electrical div    : 05.55

Net Financial Effect  Per Piece: 6.00

4) Highest Transfer Price is the Price at which the brakes division can buy the same product is the outside market, since te product is available at $14.3 in the market this is the highest Transfer price

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