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 $16 per unit Polk is currently operating at less than its full capacity of 610,000 units and has variable costs of $7 per unit The full cost to manufacture the unit is $11. Polk currently sells 460,000 units at a selling price of $18 per unit a. What will be the effect on Avery Company's operating proft fthe 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? O Type here to search

Explanation / Answer

Requirement a Effect on Avery Company's Operating profit if the transfer is made internally Bishop's purchase price 16 If purchased from Polk 7 Difference 9 X 25000 units 225000 profit will Increase by 225000 Requirement b Minimum transfer price from polk's perspective 7 as it would like to recover its direct variable costs Requirement c Maximum transfer price from Bishop's perspective 16 as this is price at which it is purchasing from outside supplier.

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