Cassie\'s Computer Parts has two decentralized divisions, Hardware and Pre-Fab.

Question

Cassie's Computer Parts has two decentralized divisions, Hardware and Pre-Fab. Pre-Fab has always purchased certain units from Hardware at $230 per unit. Because Hardware plans to raise the price to $260 per unit, Pre-Fab desires to purchase these units from outside suppliers for $230 per unit. Hardware's costs follow: variable costs per unit, $200; annual fixed costs, $30,000. Annual production of these units for Pre-Fab is 1,500 units.
If Pre-Fab buys from an outside supplier, the facilities Hardware uses to manufacture these units would remain idle. What would be the result if Cassie's Computer Parts management enforces a transfer price of $260 per unit between Hardware and Pre-Fab?

Explanation / Answer

Hi,

Please find the answer as follows:

When the price was 230

Pre-Fab Costs = 1500*230 = 345000

Hardware's Net Income

When the transfer price is fixed at 260

Pre-Fab Costs = 1500*260 = 390000

Hardware's Net Income

Increase in cost for Pre-Fab = 390000 - 345000 = 45000

Net Benefit for Pre-Fab = 60000 - 15000 = 45000

Increase in cost for Pre-Fab will be adjusted against increase in income for Hardware. However from division's point of view, Pre-Fab will be at a disadvantage if it buys the product from Hardware.

Thanks.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.