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Unformatted text preview: 12-49 (10 MINUTES) + INCLASS DISCUSSION
1. Transfer price = outlay
cost = $450* + opportunity
cost + $120† = $570 *Outlay cost = unit variable production cost
† Opportunity cost = forgone contribution margin
= $570 – $450 = $120 2. If the Fabrication Division has excess capacity, there is no opportunity cost associated
with a transfer. Therefore:
Transfer price = outlay
cost + = $450 + opportunity
0 = $450 3. In class Question
Assuming the assembly division needs 2,000 units of smaller and less
complex component. The expected total variable costs for these smaller
component is $225 per unit, however this cost includes packaging material
costs of $25 per units which will no longer be necessary if the goods were
not to be shipped to an outside customer.
Fabrication division has No excess capacity. If the Fabrication Division were
to produce these smaller units for the assembly division, the production and
sales of current components would drop by 1,000 units. i.e. for every two
units transferred to Assembly division, Fabrication division will need to cut
1 unit sales to an outside customer.
Assembly division can buy the smaller components from an outside supplier
for $280 each.
What is the range of transfer prices, if any, within which both
divisions' profits would increase as a result of agreeing to the
transfer of 2,000 components per year from the Fabrication Division
to the Assembly Division? From Fabrication Divisions perspective:
Transfer price ≥ ($225-$25) +[($570-$450) × 1,000]/2,000
Transfer price ≥ $260
From Assembly division perspective:
$280≥ Transfer price
Therefore, the range of transfer prices is
$280≥ Transfer price ≥ $260
If divisions agree on a transfer price, then the company as a whole will profit
by ($280 - $260) x 2,000 units = $40,000 ...
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This note was uploaded on 02/18/2012 for the course BUSE 237 taught by Professor Sf during the Spring '12 term at Simon Fraser.
- Spring '12