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 from an outside vendor. Division A needs 14,700 lamps for the coming year.

Division B has the capacity to manufacture 54,200 lamps annually. Sales to outside customers are estimated at 39,500 lamps for the next year. Reading lamps are sold at $12 each. Variable costs are $6 per lamp and include $1 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 $119,070.

Consider the following independent situations.

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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 from an outside vendor. Division A needs 14,700 lamps for the coming year.

Division B has the capacity to manufacture 54,200 lamps annually. Sales to outside customers are estimated at 39,500 lamps for the next year. Reading lamps are sold at $12 each. Variable costs are $6 per lamp and include $1 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 $119,070.

Consider the following independent situations.

Explanation / Answer

A. What should be the minimum transfer price accepted by Division B for the 14,700 lamps and the maximum transfer price paid by Division A?

Minimum Transfer Price = $ 5.00 per unit ( Variable cost)

Maximum Transfer Price = $ 10.00 per unit (brought price from outseider)

B. Suppose Division B could use the excess capacity to produce and sell externally 20,580 units of a new product at a price of $8 per unit. The variable cost for this new product is $7 per unit. What should be the minimum transfer price accepted by Division B for the 14,700 lamps and the maximum transfer price paid by Division A?

Minimum Transfer Price = $ 6.00 per unit ( variable cost + proporationate opputunity cost of $ 1.00 per unit)

Maximum Transfer Price = $ 10.00 per unit (brought price from outseider)

C. If Division A needs 20,580 lamps instead of 14,700 during the next year, what should be the minimum transfer price accepted by Division B and the maximum transfer price paid by Division A?

Minimum Transfer Price = $ 6.40 per unit ( variable cost + opputunity cost of $ 1.40 per unit)

Maximum Transfer Price = $ 10.00 per unit (brought price from outseider)

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