Question 1: A firm has two divisions: an UP division and a DOWN division that op

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Question 1: A firm has two divisions: an UP division and a DOWN division that operate with autonomy. The UP division manufactures two different products, one of which is transferred to the DOWN division within the same company, and the other product is sold externally. The external market price for the latter product is $120 per unit. The transfer price for the internally transferred product is based on its full cost in the UP division plus a mark-up of 20% over its full cost. The current total indirect manufacturing costs in the UP division are $120,000, consisting of $40,000 variable overhead and $80,000 fixed overhead. The firm allocates all overhead costs to the products based on their respective direct labor costs (dollars). The current sales quantities and direct costs incurred in the UP division are given in the table below: Output Direct labor costs Direct material costs Marketing costs Current Internall Transferred Units 1,000 $20,000 $30,000 Current Externall Sold Units 900 $20,000 $20,000 $5,000 A new external customer offers to buy from the UP division 600 units of a slightly modified version of the externally sold product at a unit price of $90. It is commonly known that the entire industry has idle capacity, which also holds for the UP division. The new order would result in additional direct labor costs of $20,000, additional direct material costs of $17,000 and additional variable overhead costs of $15,000. Total fixed production costs will remain unchanged. Required: a. Calculate the current price used (per unit) when the UP division transfers units to the DOWN division. b. Should the offer from the new external customer be accepted from a firm-wide perspective? Show calculations to support your answer. c. If division managers are compensated on the basis of division income, will the UP division accept the offer from the new external customer? Show calculations to support your answer.

Explanation / Answer

Internal External offer Output 1000 900 600 Direct labor costs 20000 20000 20000 Direct material costs 30000 20000 17000 Marketing costs 0 5000 0 Fixed overhead 40000 40000 0 Variable overhead 20000 20000 15000 Total costs 110000 105000 52000 Mark-up (20%) 22000 0 Transfer price 132000 Cost price per unit 110 117 87 selling price per unit 90 a. Current price used to transfer units from UP division is $132 per unit b. This endeavor results in a marginal profit to the company. In order toutilize idle capacity, this should be accepted. c. Assuming that this will have a positive impact on the labor costs, the UP division will accept the offer. Since there is no data available on division managers compensation, I am unable to share any calculations.

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