Avery Company has two divisions, Polk and Bishop. Polk produces an item that Bis

Question

Avery Company has two divisions, Polk and Bishop. Polk produces an item that Bishop could use in its production. Bishop currently is purchasing 25,000 units from an outside supplier for $14 per unit. Polk is currently operating at less than its full capacity of 620,000 units and has variable costs of $6 per unit. The full cost to manufacture the unit is $10. Polk currently sells 450,000 units at a selling price of $18 per unit a. What will be the effect on Avery Company's operating profit if the transfer is made internally? b. What is the minimum transfer price from Polk's perspective? c. What is the maximum transfer price from Bishop's perspective? nster Price

Explanation / Answer

a.

Avery company's profit Increases if the transfer is made internally as Polk division is currently operating at less than full capacity.

Relavent costs = Variable costs

Increase in profit = 25,000 * 6 = 150,000

b.

Minimum transfer price from Polk's perspective = Variable cost per unit

Minimum transfer price = 6 per unit

c.

Maximum transfer price from Bishop's perspective = Purchase cost from outside supplier

Maximum transfer price = 14 per unit.

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