5. Division N has asked Division M of the same company to supply it with 10,000
ID: 2589067 • Letter: 5
Question
5. Division N has asked Division M of the same company to supply it with 10,000 units of part P782 this year to use in one of its products. Division N has received a bid from an outside supplier for the parts at a price of $25.00 per unit. Division M has the capacity to produce 50,000 units of part P782 per year. Division M expects to sell 46,000 units of part P782 to outside customers this year at a price of $26.00 per unit. To fill the order from Division N, Division M would have to cut back its sales to outside customers. Division M produces part P782 at a variable cost of $17.00 per unit. The cost of packing and shipping the parts for outside customers is S1.00 per unit. These packing and shipping costs would not have to be incurred on sales of the parts to Division N. 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 10,000 parts this year from Division N to Division M? b. Is it in the best interests of the overall company for this transfer to take place? Explain.Explanation / Answer
5)
Total capacity of Division M = 50000 units
Total sales of Division M = 46000 units
Unused Capacity = 50000 - 46000 = 4000 units
If there is unused capacity in any divisin then transfer is to made at variable cost upto such unsed capacity and beyond unsed capacity,transfer is to made to another division at variable cost + profit i.e. net sale price to outside customers.
In the given question, Variable cost to Division M is $17 per unit and unsed capacity is 4000 units. So, 4000 units should be transferred from Division M to Division N at $17 per unit.
Units demanded by Division N = 10000
Rest of units (10000 - 4000) = 6000 units is to be transferred from Division M to Division N at cost + profit i.e. sale to outside customers. 6000 units to be transfered at $25 (26-1) per unit. $ 1 is deducted because Division M need not to incurr cost of shippingand packing if supplied to Division N.
So, following is the range of transfer prices:
Units
Transfer Price
Upto 4000 units
$17
From 4001 units to 10000 units
$25
b) The unused capacity of Division N is only 4000 units and demand by Division M is 10000 units. Only 4000 units should be transferred by Division N to Division M and it is beneficial to both department but beyond 4000 units i.e. for the next 6000 units Division M is indifferent in taking from Division N or from outsiders because both are supplying at the rate of $25. Division N will loose its customers beyond 4000 units with no absolute benefit to Division M. So, only 4000 units should be transferred from Division N to Division M which is in the overall interest of company.
Units
Transfer Price
Upto 4000 units
$17
From 4001 units to 10000 units
$25
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