P9-41A Zapp Manufacturing Company makes various electronic products. The company
ID: 2514680 • Letter: P
Question
P9-41A Zapp Manufacturing Company makes various electronic products. The company is divided into autonomous divi (SO 6) sions that can either sell to internal units or sell externally. All divisions are located in buildings on the same piece of property. Determine the The board division has offered the chip division $20 per unit to supply it with chips for 30,000 boards. It has been purchas minimum transfer ing these chips for $22 per unit from outside suppliers. The chip division receives $22.50 per unit for sales made to outside price with no excess customers on this type of chip. The variable cost of chips sold externally by the chip division is $14.50. It estimates tha capacity save $4.50 per unit in selling expenses on units sold internally to the board division. The chip division has no excess capacity. Instructions (a) Calculate the minimum transfer price that the chip division should accept. Discuss whether it is in the chip division?s best interest to accept the offer. (b) Suppose that the chip division decides to reject the offer. What are the financial consequences for each division, and (b) Total loss to company for the company as a whole, of this decision? $120,000Explanation / Answer
Answer for a)
Any amount i.e greater than $10 per unit[i.e $14.5-$4.5] can be accepted as minimum transfer price.
Here,the price that is offered by the board division can be accepted as minimum transfer price.It is the chip division best interest to accept the offer as it can gain $2 per unit additionally compared to the ontside sources as although it is gaining $2.5($22.5-$22) additionally it is loosing $4.5 in excess as selling expenses.
Answer for b)
If the chip division rejects the offer then the companies cost additionally increases by $6.5 per unit and gains $2.5 per unit in excess i.e the companies costs additionally increases by $120000(i.e 30000 boards×($6.5-$2.5)) in total.
Answer for SO 6)
Minimum transfer price is a price where the price must be greater than or equal to marginal costs where anything less than it would result in loss.
The minimum transfer price is anything that is greater than $10 per unit if it is transferred internally or anything in excess of $14.5 per unit if sold externally.
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