Nelcro Company’s Electrical Division produces a high-quality transformer. Sales
ID: 2380616 • Letter: N
Question
Nelcro Company’s Electrical Division produces a high-quality transformer. Sales and cost data on the transformer follow:
Nelcro Company has a Motor Division that would like to begin purchasing this transformer from the Electrical Division. The Motor Division is currently purchasing 11,000 transformers each year from another company at a cost of $37 per transformer. Nelcro Company evaluates its division managers on the basis of divisional profits.
Assume that the Electrical Division is now selling only 48,000 transformers each year to outside customers.
From the standpoint of the Electrical Division, what is the lowest acceptable transfer price for transformers sold to the Motor Division? (Omit the "$" sign in your response.)
From the standpoint of the Motor Division, what is the highest acceptable transfer price for transformers acquired from the Electrical Division? (Omit the "$" sign in your response.)
If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 11,000 transformers from the Electrical Division to the Motor Division?
From the standpoint of the entire company, should a transfer take place?
Assume that the Electrical Division is now selling all of the transformers it can produce to outside customers.
From the standpoint of the Electrical Division, what is the lowest acceptable transfer price for transformers sold to the Motor Division? (Omit the "$" sign in your response.)
From the standpoint of the Motor Division, what is the highest acceptable transfer price for transformers acquired from the Electrical Division? (Omit the "$" sign in your response.)
If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 11,000 transformers from the Electrical Division to the Motor Division?
From the standpoint of the entire company, should a transfer take place?
Nelcro Company’s Electrical Division produces a high-quality transformer. Sales and cost data on the transformer follow:
Explanation / Answer
Selling price per unit $48 Less Variable costs per unit $20 ----------------------------------------- Cont pu = $28 AT full capacity, Total Cont = $28*59000 = $1652,000 Less Fixed costs = $7*59000 = $413,000 --------------------------------------------------- DIvisional Profit $1,239,000 ...................................(A) BEP (Units) = Fixed costs/Cont pu = $413000/$28 = 14750 SO Margin of Safety = 59000-14750 = 44250 1. Assume that the Electrical Division is now selling only 48,000 transformers each year to outside customers. a. From the standpoint of the Electrical Division, what is the lowest acceptable transfer price for transformers sold to the Motor Division? (Omit the "$" sign in your response.) Lowest price will be Var cost pu + Fc PU = 20+7 = $27 pu. However current purchase price from Outside supplier is $37. So Electrcial div will try for a price of $37 & lowest acceptable price wll be $27pu Transfer price $27 pu b. From the standpoint of the Motor Division, what is the highest acceptable transfer price for transformers acquired from the Electrical Division? (Omit the "$" sign in your response.) Motor division will like to pay only the Var cost pu as Fixed costs are period costs & will be incurred irrespective of Motor diviion buying the txfermer. Transfer price $ 20 pu c. If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 11,000 transformers from the Electrical Division to the Motor Division? Yes d. From the standpoint of the entire company, should a transfer take place? Transfer should take place. This will help in Saving costs which are being paid to outside supplier 2. Assume that the Electrical Division is now selling all of the transformers it can produce to outside customers. a. From the standpoint of the Electrical Division, what is the lowest acceptable transfer price for transformers sold to the Motor Division? (Omit the "$" sign in your response.) Current purchase price from Outside supplier is $37. So Electrcial div will try for a price of $37 as it has no Loss in profits if Motor division doesn;t buy Transfer price $ 37 b. From the standpoint of the Motor Division, what is the highest acceptable transfer price for transformers acquired from the Electrical Division? (Omit the "$" sign in your response.) Motor Div wwill like to pay only VC pu + FC pu = 20+7 = 27 Transfer price $ 27 c. If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 11,000 transformers from the Electrical Division to the Motor Division? No d. From the standpoint of the entire company, should a transfer take place? Transfer should not take place.
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