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 $10.10 from an outside vendor. Division A needs 11,100 lamps for the coming year.
  Division B has the capacity to manufacture 49,600 lamps annually. Sales to outside customers are estimated at 38,500 lamps for the next year. Reading lamps are sold at $12.09 each. Variable costs are $6.87 per lamp and include $1.41 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 $75,900. Consider the following independent situations.

If Division A needs 14,800 lamps instead of 11,100 during the next year, what should be the minimum transfer price accepted by Division B and the maximum transfer price paid by Division A? (Round answers to 2 decimal places, e.g. 15.25.)

Minimum transfer price accepted by Division B $__________Per unit

Maximum transfer price paid by Division A $____________Per unit

Explanation / Answer

IF Division B Sales to Outside Agency then the Margin will be as follows

For 11600 Units the Transfer price wlll be as under. For 11600 Units they have the additional capacity which they do not have the order so for those units the Oppertunity cost will be Zero whereas for additional 3700 Units will be 5.68 (Contribution Per Unit as earned by Division B on sale of lamp to Outside)

Trannsfer price= Oppertunity Cost+Variablce cost per unit

Transfer Price upto 11,600 Units = 0+(6.87--1.41)

=5.46

Transfer price for additonal 3700 Units = 5.68+(6.87-1.41)

=11.14

So For First 11,100 Units the Minimum Transfer Price will be $5.46 and for remaining $3700 the Minimum Transfer Prices will be $11.14.

Maximum Transfer Price Paid by Division A is 10.10 as beyond that it will be cheaper for Division A to purchase from Outside.

Sales Price 12.09 Variable cost 6.41 Contribution Per Unit 5.68

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

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