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Collyer Products Inc. has a Valve Division that manufactures and sells a standard valve as follows:
Capacity in units 160,000
Selling price to outside customers on the intermediate market $ 20
Variable costs per unit $ 12
Fixed costs per unit (based on capacity) $ 9

The company has a Pump Division that could use this valve in the manufacture of one of its pumps. The Pump Division is currently purchasing 16,000 valves per year from an overseas supplier at a cost of $19 per valve.
Required:
1.

Assume that the Valve Division has ample idle capacity to handle all of the Pump Division's needs. What is the acceptable range, if any, for the transfer price between the two divisions?
2.

Assume that the Valve Division is selling all that it can produce to outside customers on the intermediate market. What is the acceptable range, if any, for the transfer price between the two divisions?

3.

Assume again that the Valve Division is selling all that it can produce to outside customers on the intermediate market. Also assume that $2 in variable expenses can be avoided on transfers within the company, due to reduced selling costs. What is the acceptable range, if any, for the transfer price between the two divisions?

4.

Assume the Pump Division needs 40,000 special high-pressure valves per year. The Valve Division's variable costs to manufacture and ship the special valve would be $10 per unit. To produce these special valves, the Valve Division would have to reduce its production and sales of regular valves from 160,000 units per year to 80,000 units per year. As far as the Valve Division is concerned, what is the lowest acceptable transfer price? (Round your answer to 2 decimal places.)

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Deanna Hettinger
Deanna HettingerLv2
29 Sep 2019

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Tumi Sdn Bhd has two divisions: Pump Division and WashingMachine division. The Pump division produces pumps which it cansell its product to outside market and within the division. PumpDivision has the capacity to manufacture 12,000 units of pumps eachyear but only 8,000 units can be sold to the outside market. Thispump sells for RM15 per unit on the outside market. The WashingMachine division buys 4,000 units of pumps each year from PumpDivision, and thus far has paid the market price. The outsidesupplier, Silky Bhd has recently offered to sell Washing MachineDivision 4,000 units per year of the same part at the RM14 perunit, less a 10% discount. The Pump Division couldavoid RM1 per unit in variable costs on any sales to the Washingmachine Division. Pump Division's costs relating to the productare:

Variable cost per unit RM10

Fixed costs (per year) (relevant range 0 to 14,000units) RM30,000

Answer the following questions:

In a current situation:

What is the minimum price that Pump Division can offer toWashing Machine Division?

What is the maximum price that Pump Division can offer toWashing Machine Division?

If Washing Division requested Pump Division to sell to itsdivision at RM8 per unit. Should Pump Division accept or reject therequest? Explain your answer.

If Pump Division operates at full capacity and can sell theentire products. Calculate the minimum price that Pump Division canoffer to Washing Machine Division.

Suppose that the Washing Machine Division buys the 4,000 unitsfrom the outside supplier at a price of RM14 per unit, less a 10%discount. Suppose that Pump Division has excess capacity of 4,000units. As a result of Washing Machine Division shifting itspurchases to the outside supplier, how would the yearly netoperating income of Tumi Sdn. Bhd. be affected?

In each of the cases below, assume that Division X has a productthat can be sold either to outside customers or to Division Y ofthe same company for use in its production process. The managers ofthe divisions are evaluated based on their divisional profits.

Case
A B
Division X:
Capacity in units 103,000 94,000
Number of units being sold tooutside customers 103,000 78,000
Selling price per unit tooutside customers $ 53 $ 33
Variable costs per unit $ 26 $ 14
Fixed costs per unit (based oncapacity) $ 8 $ 4
Division Y:
Number of units needed forproduction 16,000 16,000
Purchase price per unit nowbeing paid to an outside supplier $ 47 $ 28

In each of the cases below, assume that Division X has a productthat can be sold either to outside customers or to Division Y ofthe same company for use in its production process. The managers ofthe divisions are evaluated based on their divisional profits.

Case
A B
Division X:
Capacity in units 103,000 94,000
Number of units being sold tooutside customers 103,000 78,000
Selling price per unit tooutside customers $ 53 $ 33
Variable costs per unit $ 26 $ 14
Fixed costs per unit (based oncapacity) $ 8 $ 4
Division Y:
Number of units needed forproduction 16,000 16,000
Purchase price per unit nowbeing paid to an outside supplier $ 47 $ 28

Required:

1-a. Refer to the data in case A above. Assume in this case that$3 per unit in variable selling costs can be avoided onintracompany sales.
Variable Cost per unit:
Less avoidabe cost:
Total Contribution Margin on lost sales:
No. of units transferred:
Transfer price:

2-a. Refer to the data in case B above. In this case, there willbe no savings in variable selling costs on intracompany sales.Determine the transfer price of the selling division.

2-b. If the managers are free to negotiate and make decisions ontheir own, will a transfer take place?

2-c. What is the range of transfer price the managers of bothdivisions should agree? The lowest transfer price would be ______and the highest transfer price would be______.

 Minnesota Co. has two divisions: the electronics division and the sub-assembly division.      
The electronics division manufactures circuit boards for electronic components. One of the parts it manufactures is circuit board CB136, which has a selling price of $40 per unit on the market. The part has a variable unit cost of $26 and a fixed cost of $8 per unit based on full use of capacity. Minnesota currently produces and sells 425,000 units of its 450,000-unit capacity to customers outside of the company.   
      
The sub-assembly division manufactures electronic components used in automotive parts. One of its components, the SR20, includes a circuit board that is similar to the CB136. Currently, the division buys the circuit board from an outside supplier at a cost of $35 per unit. In the manufacture of the SR20, the sub-assembly division adds an additional $18 of variable costs per unit, applies $7 of fixed costs per unit and sells the completed component for $75. If a transfer took place between divisions, the sub-assembly division could use 100,000 units of part CB136.    
Given that each division manager has decision autonomy, what is the minimum transfer price that the electronics division would be willing to accept for CB136?

a) $26.00
b) $34.00
c) $36.50
d) $40.00

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