The following information applies to the questions displayed below.] In each of
ID: 2595326 • Letter: T
Question
The following information applies to the questions displayed below.] In each of the cases below, assume that Division X has a product that can be sold either to outside customers or to Division Y of the same company for use in its production process. The managers of the divisions are evaluated based on their divisional profits Case Division X: Capacity in units Number of units being sold to outside customers Selling price per unit to outside customers Variable costs per unit Fixed costs per unit (based on capacity) 98,000 98,000 57 27 98,000 80,000 34 14 Division Y Number of units needed for production Purchase price per unit now being paid to an outside supplier 18,000 18,000 49 28Explanation / Answer
1-b No the transfer price will not take place because the product X is available from the market at a lower price
i.e. $49. Hence the division Y will purchase the product form market at $49 instead of taking it from division
X at $55.
Case B
2-a
2-b Yes the transfer price will take place because the tranfer price fixed above (i.e. $14) is below the price offered
by the supplier to division Y (i.e. $28)
2-c Division X will not transfer the 18000 units less than the variable cost i.e. $14 where as Division Y will not take the product above the price offered by the supplier i.e. $28.
Hence the lowest transfer price would be $14 and the highest transfer price would be $28
Case A 1-a Total Capacity 98000 unutilized capacity 0 Therefore, such transfer price will be fixed which will cover the variable cost per unit and the contribution lost per unit selling price per unit 57 variable cost -27 contribution per unit 30 Calculation of transfer price Reduced variable cost (27-2=25) 25 Contribution lost 30 Transfer price 55Related Questions
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