Corporate policy at Weber Pty Ltd requires that all transfers between divisions

Question

Corporate policy at Weber Pty Ltd requires that all transfers between divisions be recorded at variable cost as a transfer price Divisional managers have complete autonomy in choosing their sources of customers and suppliers. The Milling Division sells a product called RK2. Forty per cent of the sales of RK2 are to the Products Division, while the remainder of the sales are to outside customers The manager of the Milling Division is evaluating a special offer from an outside customer for 10 000 units of RK2 at a per unit price of $15. If the special offer were accepted, the Milling Division would be unable to supply those units to the Products Division. The Products Division could purchase those units from another supplier for $17 per unit. Annual capacity for the Milling Division is 25 000 units. The 2014 budget information for the Milling Division, based on full capacity, is presented below Units Sales Variable costs Fixed costs Products division 10 000 S100 000 (S100 000) (S24 000) Outsiders 15 000 S270 000 (S150 000) (S36 000) Total 25 000 S370 000 (S250 000) (S60 000) Assume that demand increases for the Milling Division. 20 000 units can be sold at the regular price to outside customers and the Products Division's annual demand remains at 10 000 units. What is the transfer price that would be calculated under the general transfer-pricing formula? A. $12.00 B. $14.00 C. $16.00 D. $18.00

Explanation / Answer

Selling price to outsiders = $ 270000/15000 = $18 per unit

Selling price to Product division = $100000/10000 = $10 per unit

Contribution lost in case the demand increases and Milling division continues supplying to Product division

$ (18-10)x5000 units = $40000

If Product division buys from outside then loss will be = $17 x 10000 units = $170000

Total loss in this case will be = $ 210000

So price per unit should be such that there is no loss so to cover it price would be = 210000 / 15000 = $14

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