TB Problem Qu. 11A-91 Fyodor Corporation has a Parts Division that.. Fyodor Corp
ID: 2564844 • Letter: T
Question
TB Problem Qu. 11A-91 Fyodor Corporation has a Parts Division that.. Fyodor Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers. The company's Machine Division has asked the Parts Division to provide it with 8,000 special parts each year. The special parts would require $19.00 per unit in variable production costs. The Machine Division has a bid from an outside supplier for the special parts at $27.00 per unit. In order to have time and space to produce the special part, the Parts Division would have to cut back production of another part-the QR4 that it presently is producing. The QR4 sells for $34.00 per unit, and requires $18.00 per unit in variable production costs. Packaging and shipping costs of the QR4 are $2.00 per unit. Packaging and shipping costs for the new special part would be only $0.50 per unit. The Parts Division is now producing and selling 40,000 units of the QR4 each year. Production and sales of the QR4 would drop by 5% if the new special part is produced for the Machine Division. Required a. What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 8,000 special parts per year from the Parts Division to the Machine Division? b. Is it in the best interests of Fyodor Corporation for this transfer to take place? Explain Essay Toolbar navigationExplanation / Answer
Offer received by Mchine Department from outside supplier = $27 per unit
Selling price of alternative QR4 part which the Parts department is now selling $34.00
Variable cost for this product:
Variable manufacturing cost $18.00
Variable shipping and packing cost $ 2.00 $20.00
Loss of contribution if the special order is accepted $14.00
Present level of production and sale of QR4 40,000
Loss of sale of QR4 if the special order is accepted (5% of 40,000) 2,000
Loss of contrubition due to the special order (2,000 x 14) $28,000
Quantity of special order : 8,000
Variable production costs per unit of the special part = $19.00
Variable shipping and packaging cost fr the special part =$ 0.50
Loss of contribution per unit due to the special order (28,000/8,000) =$ 3.50
Total cost to be recovered by Parts department , per unit = $23.00
Therefore any transfer price between $23 and $27 per unit will be beneficial to both the divisions and the company as a whole.
(b) It is in the best interest of Fyodor Corporation for this transfer to take place as this will enable Machnie division to have a better control over the supply of the part (parts division being from the same company). This also helps the company
The sales, pricing and the production departments can be coordinated through this method. The managers can also get aware of the value of the services and the products in other segments of the firm.
It helps in generating not only the reported profits of the entire center but also the resource allocation of the organization.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.