4. Crede Inc. has two divisions. Division A manufactures and sells student desks

Question

4. Crede Inc. has two divisions. Division A manufactures and sells student desks. Division B manufactures and sells reading lamps. Each desk has a reading lamp as one of its components. Division A carn purchase reading lamps at a cost of $10 from an outside vendor. Division A needs 10,000 lamps for the coming year Division B has the capacity to manufacture 50,000 lamps annually. Sales to outside customers are estimated at 40,000 lamps for the next year. Reading lamps are sold at $12 each. Variable costs total $7 per lamp which includes $1 of variable selling costs that are not incurred if lamps are sold internally to Division A. The total amount of fixed costs for Division B is $80,000. Instructions Consider the following independent situations. (a) What should be the minimum transfer price accepted by Division B for the 10,000 lamps and the maximum transfer price paid by Division A? Explain. (b) Suppose Division B could use the excess capacity to produce and sell externally 15,000 units of a NEW product at a price of $7 per unit. The variable costs for this new product total to $5 per unit. What should be the minimum transfer price accepted by Division B for the 10,000 lamps and the maximum transfer price paid by Division A? Explain. (c) If Division A needs 15,000 lamps instead of 10,000 during the next year, what should be the minimum transfer price accepted by Division B and the maximum transfer price paid by Division A? Explain. (d) Assume instead that Division B's capacity is only 40,000 lamps annually and sales to outside customers are estimated at 40,000 lamps for the next year What should be the minimum transfer price accepted by Division B for the 10,000 lamps and the maximum transfer price paid by Division A? Explain.

Explanation / Answer

Div B Reading lampus If selling outside - Selling 12 V cost - MFG 6 V cost selling 1 Contribution 5 Minimu price by B would be anything more than 6 . Because it is v cost of manufaturing and they have spare capcity due to less demand in outside market . While A shoud not give more than 10, because at this price A can get units from market B- Contribution on excess 15000 units will be   30000 ( 15000 x 7-2) Cost of contribution on 10000 units will be 3 USD , Plus v vost of reading map is 6 thus total minimum price is 9 Maximumk price A can pay is USD 10 per unit C considering B point , cost of contribution will decrease at 2 USD ( 30000 / 15000) plus v csot of mfg 6 hence total minimum price will be 8 Maximum price A can pay will be USD 10 D Minimu price would be V cost MFG 6 and contribution foregone 5 thus total 11 maximum price A can pay is 10 .

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