Samson Company has a Motor Divison that would like to begin purchasing this tran
ID: 458609 • Letter: S
Question
Samson Company has a Motor Divison that would like to begin purchasing this transformer from the Electrical Division. The Motor Division is currently purchasing 10,000 transformers each year from another company at a cost of $38 per transformer. Samson Company evaluates its division managers on the basis of divisional profits.
1. Assume that the Electrical Division is now selling only 50,000 transformers each year to outside customers.
a) From the standpoint of the Electrical Division, what is te lowest acceptable transfer price for transformers sold to the Motor Division?
b) From the standpoint of the Motor Division, what is the highest acceptable transfer price for transformers acquired from the Electrical Division?
c) If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 10,000 transformers from the Electrical Division to the Motor Division? Why or Why not?
d) From the standpoint of the entire company, should a transfer take place? Why or Why not?
2. Assume that the Electrical Division is now selling to outside customers all of the transformers it can produce.
a) From the standpoint of the Electrical Division, what is te lowest acceptable transfer price for transformers sold to the Motor Division?
b) From the standpoint of the Motor Division, what is the highest acceptable transfer price for transformers acquired from the Electrical Division?
c) If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 10,000 transformers from the Electrical Division to the Motor Division? Why or Why not?
d) From the standpoint of the entire company, should a transfer take place? Why or Why not?
Explanation / Answer
a) From the standpoint of the Electrical Division, the lowest acceptable transfer price for transformers sold to the Motor Division = $ 30 .
As they have excess (unutilised) capacity of 10000 (= 60000 - 50000) which can be suppled to Motor division, which can be transfered to Motor division at Total cost (fixed cost $21 + variable cost $9)
b) From the standpoint of the Motor Division, the highest acceptable transfer price for transformers acquired from the Electrical Division = $ 38 , this is the competitive price that they are already buying from another company
c) If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 10,000 transformers from the Electrical Division to the Motor Division? Why or Why not?
Although the electrical division has an excess capacity, however, we cannot expect division managers to agree to the transfer without a substantial contribution margin. Because the production of 10000 transformers will require additional managerial effort , in addition to the cost, which the division managers would expect to be compensated for.
d) From the standpoint of the entire company, should a transfer take place? Why or Why not?
From the company standpoint, the transfer should take place, as it will result in savings for the company to the extent of the difference of the cost price of transformers as produced by the electrical division and the purchase price of transformers as purchased by the Motor division from another company.
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