Vivataxon, Inc. manufactures parts in Shionga, a country with a tax rate of 35%.
ID: 2586642 • Letter: V
Question
Vivataxon, Inc. manufactures parts in Shionga, a country with a tax rate of 35%. Those parts are essential components for the electronic components manufactured in another division, located in Uswary, where the tax rate is 30%. The Shionga division currently has a capacity of 10,000 units, all of which the Uswary division needs for goods. They could sell up to 4,000 units on the open market as well; the current market price for the parts is $15 per unit. Variable costs are $7 per unit for the Shionga division, and $5 per unit for the Uswary division (in addition to the cost of the parts). Fixed costs are $40,000 for the Shionga division and $50,000 for the Uswary division. The Uswary division sells its electronic components for $30 per unit.
a. Calculate the transfer price if it is based on variable costs with a 15% markup.
Dollars
b. Calculate the transfer price if it is based on full costs with a 15% markup.
Dollars
c. What is the minimum price the manufacturing division will accept in a negotiation?
Dollars
d. What is the maximum price the packaging division will accept in a negotiation?
Dollars
Explanation / Answer
Shionga Division
Mark-up@15%
Total
Uswary Division
Own Cost
Variable Cost @7 per Unit
70000
10500
80500
$5 per unit+ (price of parts)
Fixed Cost
40000
6000
46000
50,000
Total Cost
110000
16500
126500
Price Per unit
12.65
Transfer price if it is based on variable costs with a 15% markup.
$8.05
Transfer price if it is based on full costs with a 15% markup
$12.65
Minimum price the manufacturing division will accept in a negotiation
Minimum price should be sale price if sold externally by transfer out division, Shionga division will sell parts to external customer @ $15 per unit. So minimum price to accept in negotiation will be $15. Also, as no sales are forgone with internal transfers, opportunity cost will not be applicable here.
Maximum price the packaging division will accept in a negotiation
Maximum price should be marginal revenue of transfer in division(Uswary division)
$
Sale Price @30 per Unit
300000
Less Fixed Cost
50000
Less Own VC
50000
Balance
200000
Per Unit
20
Shionga Division
Mark-up@15%
Total
Uswary Division
Own Cost
Variable Cost @7 per Unit
70000
10500
80500
$5 per unit+ (price of parts)
Fixed Cost
40000
6000
46000
50,000
Total Cost
110000
16500
126500
Price Per unit
12.65
Transfer price if it is based on variable costs with a 15% markup.
$8.05
Transfer price if it is based on full costs with a 15% markup
$12.65
Minimum price the manufacturing division will accept in a negotiation
Minimum price should be sale price if sold externally by transfer out division, Shionga division will sell parts to external customer @ $15 per unit. So minimum price to accept in negotiation will be $15. Also, as no sales are forgone with internal transfers, opportunity cost will not be applicable here.
Maximum price the packaging division will accept in a negotiation
Maximum price should be marginal revenue of transfer in division(Uswary division)
$
Sale Price @30 per Unit
300000
Less Fixed Cost
50000
Less Own VC
50000
Balance
200000
Per Unit
20
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