The Halifax division of Canadian Controls (CC) produces adigital thermometer. The thermometer can be sold on the open marketfor $75 each or it can be used by the Ottawa division in theproduction of a temperature control gauge. The Halifax division iscurrently operating at 70% of its capacity of 2,000 digitalthermometers per month. Following are average costs per unit atthis level of capacity:
Average Cost
Directmaterials $20
Variablesupplies 10
Fixedcosts 33
Total average cost perthermometer $63
If a digital thermometer is sold on the open market, theshipping cost is $5, paid by Halifax Division. The cost of shippinga digital thermometer internally from Halifax to Ottawa Division is$1, also paid by the Halifax Division.
a) What is the best transfer price â or range of transfer prices- for Canadian Controls overall if a digital thermometer istransferred to Ottawa and the Halifax division is operating at 70%of capacity? Will transfers occur? What is the maximum number ofunits that could be transferred at this range of prices?
b) What is the best transfer price - or range of transfer prices- for Canadian Controls overall if a digital thermometer istransferred to Ottawa, but the Halifax division is operating atfull capacity and the digital thermometer could have been sold onthe open market? Will transfers occur?
c) Suppose the Ottawa division can purchase a substitute for thedigital thermometer from an outside supplier for $70 (includingshipping costs). What transfer price, if any, would motivate themanagers to transfer internally i) per part a? ii) perpart b? above.
The Halifax division of Canadian Controls (CC) produces adigital thermometer. The thermometer can be sold on the open marketfor $75 each or it can be used by the Ottawa division in theproduction of a temperature control gauge. The Halifax division iscurrently operating at 70% of its capacity of 2,000 digitalthermometers per month. Following are average costs per unit atthis level of capacity:
Average Cost
Directmaterials $20
Variablesupplies 10
Fixedcosts 33
Total average cost perthermometer $63
If a digital thermometer is sold on the open market, theshipping cost is $5, paid by Halifax Division. The cost of shippinga digital thermometer internally from Halifax to Ottawa Division is$1, also paid by the Halifax Division.
a) What is the best transfer price â or range of transfer prices- for Canadian Controls overall if a digital thermometer istransferred to Ottawa and the Halifax division is operating at 70%of capacity? Will transfers occur? What is the maximum number ofunits that could be transferred at this range of prices?
b) What is the best transfer price - or range of transfer prices- for Canadian Controls overall if a digital thermometer istransferred to Ottawa, but the Halifax division is operating atfull capacity and the digital thermometer could have been sold onthe open market? Will transfers occur?
c) Suppose the Ottawa division can purchase a substitute for thedigital thermometer from an outside supplier for $70 (includingshipping costs). What transfer price, if any, would motivate themanagers to transfer internally i) per part a? ii) perpart b? above.
