Transfer Pricing: Frances Industries has two division (Parts and Tools). The Too

Question

Transfer Pricing:
Frances Industries has two division (Parts and Tools).
The Tools Division wants to purchase a part from the Parts Division to use in manufacturing a new product.

You must show calculations for credit.

1. The Parts Division is currently manufacturing 100,000 parts per year. Tools Division asks for 20,000 parts.
   What is the minumum price (per unit) the Parts Division should charge?

2. Assume instead that the Parts Division is currently operating at full capacty (all units are sold to outside customers) and capacity can't be increased.
   What is the minumum price (per unit) the Parts Division should charge?

3. Assume instead that the Parts Division is currently selling 190,000 parts to outside customers.
   What is the minumum price (per unit) the Parts Division should charge?

Info about the requested part: Parts Division Capacity (per year) 200,000 Sales price to outside parties $ 100.00 Variable cost/part 40.00 Fixed cost/year 10,000,000.00

Explanation / Answer

1)Minimum pice =Variable cost of manufacturing = $ 40 per part

2)Minimum price =variable cost +loss of contribution on regular sales

                             = 40 + (100 -40)

                            = 40 +60

                         = $ 100 per part.

3)Minimum price = [Variable cost + loss of contribution on 10000 units ]Number of untis demanded

                              = [40 *20000 +   (100-40) *10000] / 20000

                               = [800000 + 600000 ] / 20000

                              = 1,400,000 / 20000

                            = $ 70 per part

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