The Vega Division of Ace Company makes wheels that can either be sold to outside

Question

The Vega Division of Ace Company makes wheels that can either be sold to outside customers or transferred to the Walsh Division of Ace Company. Last month, the Walsh Division bought all 4,000 of its wheels from the Vega Division for $42 each. The following data are available from last month's operations for the Vega Division: Capacity Selling Price per Wheel to Outside Customers Variable Cots per Wheel Sold to Outside Customers 12,000 wheels $45 $30 If the Vega Division sells wheels to the Walsh Division, Vega can avoid $2 per wheel in sales commissions. An outside supplier has offered to supply wheels to the Walsh Division for $41 each. Required: (Show calculations) (a) If the Vega Division has enough idle capacity so that transfers to the Walsh Division would not cut into its sales to outside customers what should be the lowest acceptable transfer price from the perspective of the Vega Division? What is the maximum price per wheel that Walsh should be willing to pay Vega? (b) (C) Suppose that Vega is able to sell 9,000 wheels each month to outside consumers. As a result, transfers to the Walsh Division will cut into outside sales. What should be the lowest acceptable transfer price from the perspective of the Vega Division?

Explanation / Answer

Answer 1

The lowest acceptable transfer price would be the variable cost which is $ 30.

There are no fixed costs and no opportunity cost as the Vega Division has idle capacity. As such, the minimum transfer price would be the variable cost to manufacture the product.

Answer 2

Walsh can pay a maximum of $ 41. This is the price at which it can buy from outside suppliers. At this price level, Walsh would be indifferent in buying from outside supplier or Vega Division. Any price above $ 41 would result in a loss to Walsh as it can always purchase at $ 41 from outside supplier itself.

Answer 3

In case the transfer to Walsh cuts down the sales to outside customers, then the Vega division should get the variable cost + the profit which it was earning from outside customers. As such, the transfer price for units which are sold to Walsh by reducing sales to outside customers is $ 45. (variable cost of $ 30 + profit of $ 15).

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