Planet Company has two divisions. Space Division, which has operating assets of
ID: 2481907 • Letter: P
Question
Planet Company has two divisions. Space Division, which has operating assets of $80,000,000 produces and sells 900,000 units of a product at a market price of $140 per unit. Variable costs total $40 per unit. The division also assigns $70 of fixed costs to each unit based on total capacity of 1,000,000 units. Earth Division wants to purchase 200,000 units from Space. However, it is only willing to pay $80 per unit because it has an opportunity to accept a special order at a reduced price. The order is economically justifiable only if Earth Division can acquire Space Division’s output at a reduced price. Required: A. If Space Division had no capacity constraints, what is the minimum transfer price it could accept on the order from Earth Division? Explain your answer. B. If Space Division could sell all units produced to the outside market, what transfer price would you recommend? Why?
Explanation / Answer
Required: A. If Space Division had no capacity constraints, what is the minimum transfer price it could accept the order from Earth Division?
In this case,Space Divison transfer on incremental cost+lost contribution
Variable Cost =40 per unit
Lost contibtuion=0
40 per unit
Required: B. If Space Division could sell all units produced to the outside market, what transfer price would you recommend? Why?
In this case,Space Divison transfer on incremental cost+lost contribution
Variable Cost =40 per unit
Lost contibtuion=100 per unit
140 per unit as it would be equal to selling price to outside customers