12-49 plus in class discussion

12-49 plus in class discussion - 12-49(10 MINUTES INCLASS...

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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 cost 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.

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12-49 plus in class discussion - 12-49(10 MINUTES INCLASS...

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