BACK Problem 8-5A Guterrez Company makes various electronic products. The compan
ID: 2508506 • Letter: B
Question
BACK Problem 8-5A Guterrez Company makes various electronic products. The company is divided into a number of autonomous divisions that can either sell to intermal units or sell externally. All divisions are located in buildings on the same piece of property. The Board Division has offered the Chip Division $22 per unit to supply it with chips for 45,000 boards. It has been purchasing these chips for $23.20 per unit from outside suppliers. The Chip Division receives $24.76 per unit for sales made to outside customers on this type of chip. The variabile cost of chips sold externally by the Chip Division is $14.43. It estimates that it will save $6.16 per chip of selling expenses on units sold internally to the Board Division. The Chip Division has no excess capacity Calculate the minimum transfer price that the Chip Division should accept. (Round answer to 2 decimal places, e.g. 10.s0.) Minimum trensfer price Should Chip Division accept the offer? 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 decision? Total contribution margin by Board Division Totalcontribution margin by Chip Division s contribution margin for the company Overall Version 4 24.5.Explanation / Answer
Req a: Minimum transfer price for chip division: Variable cost for Board division (14.43-6.16) 8.27 Add: Loss of Contribution by Chip Division 10.33 (i.e. 24.76-14.43) Minimum Transfer price 18.6 Note: here the Chip division does not exist excess capacity, theerefore, it will charge the variable cost of manufacturing and contribution lost fro making supply to Board division. Req b: Loss of Board Division: Cost of units from Supplier 23.2 less: Offer price 22 Loss of Contribution per unit 1.2 Loss of Chip Division: Offer price: 22 Less: Minimum transfer price 18.6 Loss of Contribution per unit 3.4 Loss for Company: Loss of Board division 1.2 Loss of Chip division 3.4 Total loss for company 4.6 Total Decrease of contribution margin by board division is $ 54000 (45000 units @1.20) Total Decrease in Contribution margin of Chip division is $153000 (45000 units @3.40) Total Decrease in Contribution margin for company is $ 207000 (45000 units @4.60)
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