Guthierrez company makes various electronic products. The company is divided int
ID: 2418467 • Letter: G
Question
Guthierrez company makes various electronic products. The company is divided into a number of autonomous divisions that can either sell to internal units or sell externally. All division are located in buildings on the same piece of property. The Board Divison has benn offered the Chip Division $21 per unit to supply it with chips for 40,000 boards. It has been purchasing these chips for $22 per from outside suppliers. The Chip Divisoin receives $22.50 per units for sales made to outside customers on this type of chip. The variable cost of chips sold externally by the Chip Divison is $14.50. It estimates that it will save $4.50 per chip of selling expenses on units sold internally to the Board Divisons. The Chip Division has no excess capacity.
a)Calculate the miniumum transfer price that the chip division should accept. Discuss whether it is in the chip divisions best interest to accept the offer
b)Suppose that the chip division decides to reject the offer. What are the financial implications for each division and for the company as a whole of this division.
Explanation / Answer
Variable cost 14.50-4.50 10 ADD Opportunity Cost loss of Contribution from sale to Outside(22.50-14.50) 8 Minimum transfer price 18 Lost contribution margin by Board Division 40000*(22-21) 40000 Lost contribution margin by Chip Division (21-18 )*40000 120000 Overall
Lost contribution margin for the company 160000
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