3 Collyer Products Inc has a Valve Division that manufactures and sells a standa
ID: 2574533 • Letter: 3
Question
3 Collyer Products Inc has a Valve Division that manufactures and sells a standard valve as follows 180.000 S 24 S 17 Capacity in units Selling price to outside customers on the intermediate market Variable costs per unit Fixed costs per unit (based on capacity) The company has a Pump Dhision that could use this valve in the manufacture of one of its pumps. The Pump Division is currently purchasing 18,000 valves per year from an overseas supplier at a cost of $23 per vave Required 1. Assume that the Valve Division has ample idle capacity to handle all of the Pump Diisions needs What is the acceptable range, if amy, for the transfer price between the two divisions? 2. Assume that the Valve Division is selling all that it can produce to outside customers on the intermediate market what is the acceptable fange if any, for the transfer price between the two divisions? 3. Assume again that the Valve Division is selling all that it can produce to outside customers on the intermediate market. Also assume that 54 in variable expenses can be avoided on transfers within the company, due to reduced selling costs What is the acceptable range, fan·for the transfer price between the two diisions? 4. Assume the Pump Division needs 32,000 special high-pressure valves per year. The Valve Division's ariable costs to manufacture and ship the special valve would be $12 per unit. To produce these special valves, the Valve Division would have to reduce its production and sales of regular valves from 180,000 units per year to 100,000 units per year As far as the Valve Dvsson is concerned, the lowest acceptable transfer price? (Round your answer to 2 decimal places.)Explanation / Answer
1. The variable cost incurred in producing the valves is the only relevant cost here since the company has ample idle capacity. The maximum transfer price that can be accepted is the price at which Pump division is able to purchase in the outside market. Hence the acceptable range of transfer price is from $17 to $23 per valve.
2. If the company is selling all of its production in the intermediate market, then the minimum transfer price that it will charge from Pump division is the selling price to the outisde market. Hence the transfer price that will be set by the Valve division is $24 per valve, which is not acceptable by Pump division since it can get this for $23 from outside market. Hence, there is no acceptable range of transfer price between the two divisions.
3. Now, the minimum transfer price that valve division will be accepting is $13 per unit. The acceptable range for the transfer price between the two divisions is from $13 per valve to $23 per valve.
4.
Cost of manufacture special valves ($12 x 32000) $384000 Add: Contribution to be lost on lost sales [80000 x ($24-$17)] 560000 Tota relevant cost of transfer $944000 No. of units 32000 Transfer price $29.50Related Questions
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