Rapid Industries has multiple divisions. One division, Iron Products, makes a co
ID: 2590073 • Letter: R
Question
Rapid Industries has multiple divisions. One division, Iron Products, makes a component that another division, Austin, is currently purchasing on the open market. Iron Products currently has a capacity to produce 505,000 components at a variable cost of $7.50 and a full cost of $9.50. Iron Products has outside sales of 461,000 components at a price of $14.00 per unit. Austin currently purchases 50,000 units from an outside supplier at a price of $12.00 per unit. Assume that Austin desires to use a single supplier for its component.
a. What will be the effect on Rapid Industries’ operating profit if the transfer is made internally? Assume the 50,000 units Austin needs are either purchased 100% internally or 100% externally.
b. What is the minimum transfer price? (Round your answer to 2 decimal places.)
c. What is the maximum transfer price? (Round your answer to 2 decimal places.)
Explanation / Answer
a) Calculation of Rapid earnings operating profit in both situations (Amount in $)
The operating profit of the firm will increased from $1,386,500 to $1,572,500 if Austin purchased 100% internally.
b) The minimum transfer price is always from the point of view of seller and it covers variable cost plus any opportunity cost. In this case there is loss of contribution on sales of 6,000 units to Iron Products. Therefore Iron Product will charge from Austin the Variable cost per unit plus the loss of contribution on sales of 6,000 units (461,000-455,000). Therefore the minimum transfer price is calculated as follows:-
c) The maximum transfer price is the price which the buyer would be willing to pay. the maximum transfer price should be less than the price at which the buyer division can purchase from outside supplier. In this cse Iron products would be willing to buy at less than $12. Therefore the maximum transfer price can be upto $12 per unit
Particulars Purchased Internally Purchased externally Sales of Iron Product Division (455,000*14) = 6,370,000 (461,000*14) = 6,454,000 Less: Variable cost (505,000*7.5) = (3,787,500) (461,000*7.5) = (3,457,500) Less: Purchase cost - (50,000*12) = (600,000) Less: Fixed cost [505,000*(9.5-7.5)] = (1,010,000) (1,010,000) Operating Profit 1,572,500 1,386,500Related Questions
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