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

Question

Crede Inc. has two divisions. Division A makes and sells student desks. Division B manufactures and sells reading lamps. Each desk has a reading lamp as one of its components.

Division A can purchase reading lamps at a cost of $ 10.35 from an outside vendor. Division A needs 10,100 lamps for the coming year.

Division B has the capacity to manufacture 50,400 lamps annually. Sales to outside customers are estimated at 40,300 lamps for the next year. Reading lamps are sold at $ 11.50 each. Variable costs are $ 6.73 per lamp and include $ 1.01 of variable sales costs that are not incurred if lamps are sold internally to Division A.

The total amount of fixed costs for Division B is $ 77,000 . Consider the following independent situations:

Suppose Division B could use the excess capacity to produce and sell externally 20,800 units of a new product at a price of $ 7.33 per unit. The variable cost for this new product is $ 6.37 per unit. What should be the minimum transfer price accepted by Division B for the 10,100 lamps and the maximum transfer price paid by Division A?  (Round answers to 2 decimal places, e.g. 10.50.)

Explanation / Answer

Situation 1

Division B could use the excess capacity to produce and sell externally

Produce and sell externally = 20,800 units

Price = $ 7.33 per unit.

Less- Variable cost =$ 6.37 per unit.

Profit = 20800* (7.33 - 6.37 - 1.53) = -$11856

Minimum transfer price accepted by Division B for the 10,100 lamps = Cost of manufacturing lamps

= variable cost less variable sales cost (sold internally to division A) + fixed cost

= 6.73 - 1.01 + 1.53

= $7.25

Maximum transfer price paid by Division A = cost of purchase from outside vendor

= $10.35

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