{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

4 per unit in variable costs and would require that

Info iconThis preview shows page 8. Sign up to view the full content.

View Full Document Right Arrow Icon
4. per unit in variable costs and would require that Division A cut back production of its present product by Transfer Price to maximize company profits: TP = Out of pocket costs / unit + (Total contribution margin given up on lost sales) / units transferred Proof: Division A: Contribution margin generated under the current situation $450,000 Contribution margin generated if a transfer takes place at $32.50 per unit $450,000 Division A manager is indifferent to selling outside or transferring to Division B at a TP of $32.50. Refer to case 1 above. A study has indicated that Division A can avoid $5 per unit in variable costs on TP = ( $63 - $5 ) + ($37 X 10,000 )/ 10,000 = $58 + $37 = $95 Refer to case 2 above. Assume that Division A can avoid $4 per unit in variable costs on any sales to TP = ( $19 - $4 ) + ($21 X 70,000 )/ 70,000 = $15 + $21 = $36 Assume that Division A offers to sell 70,000 units to Division B for $38 per unit and that Division B Refer to case 3 above. Assume that Division B is now receiving a 5% price discount from the outside TP = $35 + ($0 X 20,000 )/ 20,000 = $35 + $0 = $35 Assume that Division B offers to purchase 20,000 units from Division A at $52 per unit. If Division A Refer to case 4 above. Assume that Division B wants Division A to provide it with 60,000 units of a different product from the one that Division A is now producing. The new product would require $25 30,000 units annually. What is the lowest acceptable transfer price from Division A's perspective? TP = $25 + ($15 X 30,000 ) / 60,000 = $25 + ($450,000 / 60,000 ) = $25 + $7.50 = $32.50
Background image of page 8
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}