Nike makes shoes. The company has sufficient capacity to make 70,000 shoes per y

Question

Nike makes shoes. The company has sufficient capacity to make 70,000 shoes per year. The company expects to sell 65,000 shoes this year. Puma produces shoes and has a total need of 20,000 shoes this year. Puma is currently buying shoes from an outside supplier for $11.25 each. The cost to Nike to make the shoes are $5.00 for direct materials, $2.00 for direct labor, $2.50 for variable manufacturing overhead, and $1.50 for fixed manufacturing overhead. Direct labor is a variable cost. Nike sells shoes on the outside market for $11.50 each.

Assuming that Puma buys its entire 20,000 requirement of shoes from Nike, is it possible for Nike and Puma to agree to a mutually acceptable transfer price and if so, within what range would that transfer price be?

Explanation / Answer

Nilke makes 70,000 Shoes and can sell 65,000 shoes

So revenue it makes by selling 65,000 shoes = 65,000 * 11.50 = 747,500

So now, nike can sell 20,000 to puma and sell only 50,000 in open market

50,000 *11.50 + 20,000 * x = 747,500

where x is the value of transfer price

x = 8.625

Hence the transfer price can range from 8.625 to 11

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