Pizarro Manufacturing makes a variety of products, including stand mixers. Pizar
ID: 2463327 • Letter: P
Question
Pizarro Manufacturing makes a variety of products, including stand mixers. Pizarro's Stand Mixer Division can use a component, K32, manufactured by Pizarro's Electrical Division. The market price for K32 is $23 per unit. The variable cost per unit for K32 in the Electrical Division is $8, while the absorption cost per unit is $15. The divisions at Pizarro use a negotiated price strategy to set transfer prices between divisions.
What is the lowest acceptable transfer price to the Electrical Division? What is the highest acceptable transfer price that the Stand Mixer Division would pay? Explain your answer
Explanation / Answer
The minimum Transfer price = the variable cost per unit = $ 8.00.
This is because the electrical division would like to sell at a price which does not hurt its existing profits and hence the minimum would be the variable cost incurred per unit. In this case, the sale would not make any contribution towards the overheads but would not decrease the profit also.
The Maximum Purchase price = the Market Price per unit = $ 23.00.
This is because the stand mixer division would like to purchase at a price which minimizes its total cost and hence would purchase at a maximum of $ 23. The stand mixer division would can get K32 from the market at $23, so that is the maximum it should pay to the internal division.