Fyodor Corporation has a Parts Division that does work for other Divisions in th
ID: 2587054 • Letter: F
Question
Fyodor Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers. The company's Machine Division has asked the Parts Division to provide it with 5,600 special parts each year. The special parts would require $19 per unit in variable production costs. The Machine Division has a bid from an outside supplier for the special parts at $28.50 per unit. In order to have time and space to produce the special part, the Parts Division would have to cut back production of another part-the QR4 that it presently is producing. The QR4 sells for $36 per unit, and requires $18 per unit in variable production costs. Packaging and shipping costs of the QR4 are $2 per unit. Packaging and shipping costs for the new special part would be only $0.50 per unit. The Parts Division is now producing and selling 28,000 units of the QR4 each year. Production and sales of the QR would drop by 5% if the new special part is produced for the Machine Division. Required: a. What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 5,600 special parts per year from the Parts Division to the Machine Division? (Round your final answers to 2 decimal places.) Range of transfer pricesExplanation / Answer
If transfer price is greater than sum of variable cost and opportunity cost, Parts Division will get profit on inter-divisional transfer of special parts.
i.e. Transfer price > Variable cost + Opportunity cost
Variable cost = $ 19
No. of units of QRS sales drop = 5 % x 28,000 = 1,400 units
The opportunity cost is the contribution margin on the lost sales, divided by the number of units transferred.
Opportunity cost = [($ 36 - $ 18 - $ 2) x 1,400]/5,600
= $ 16 x 1,400 /5,600
= 22,400/5,600 = $ 4
Variable cost + Opportunity cost = $ 19 + $ 0.5 + $ 4 = $ 23.5
For Parts Division, transfer price > $ 23.5
For machine division to get a profit, transfer price should be less than the price offered by outside vender.
Transfer price < $ 28.5
Combining the conditions for both the division, we get the range of transfer price for special parts, which should be greater than $ 23.50 and less than $ 28.50 per unit.
Answer:
Range of transfer price: $ 23.50 < Transfer price < $ 28.50
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