Tulip Company is made up of two divisions: A and B. Division A produces a widget

Question

Tulip Company is made up of two divisions: A and B. Division A produces a widget that Division B uses in the production of its product. Variable cost per widget is $1.45, full cost is $2.40. Comparable widgets sell on the open market for $3.10 each. Division A can produce up to 2.80 million widgets per year but is currently operating at only 50 percent capacity. Division B expects to use 140,000 widgets in the current year Required 1. Determine the minimum and maximum transfer prices. (Enter your answers to 2 decimal places.) Minimum Transfer Price Maximum Transfer Price 2. Calculate Tulip Company's total benefit of having the widgets transferred between these divisions Total Benefit 3. If the transfer price is set at $1.45 per unit, determine how much profit Division A will make on the transfer. Determine how much Division B will save by not purchasing the widgets on the open market. (Round your answers to 2 decimal places.) Division A Profit per Unit Division B Savings per Unit

Explanation / Answer

1. Minimum Transfer price $1.45

Maximum Transfer Price $3.10

2. Total Benfit if transfer happend between these two division

Sale value (140000*3.1)=$434000

full cost(140000*2.4) =$336000

Toal Benfit =$98000 =$0.7

3.If transfer Price at 1.45

Division A Profit is

Transfer price 1.45

Variable cost 1.45

Profit is Zero and additonally fixed cost amount

Division B Profit = 140000(3.4-1.45)=$231000=$1.65

4. If Transer price is at $3.1

division A Profit = $3.1-$2.45=$0.65

Division B Profit =$ 3.1-$3.1=0

5 Mutually Transfer price $1.45

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