Division 1 of Ace Company makes and sells wheels that can either be sold to outs
ID: 2535626 • Letter: D
Question
Division 1 of Ace Company makes and sells wheels that can either be sold to outside customers or transferred to Division 2. The following data are available from last month:
Division 1:
Selling price per wheel to outside customers...............................................................$50
Variable cost per wheel when sold to outside customers............................................$35
Capacity in wheels......................................................................................................15,000
Divison 2
Number of wheels needed per month.........................................................................5,000
Price per wheel paid to an outside supplier.................................................................$47
If Division 1 sells the wheels to Divison 2, Division 1 can avoid $2 per wheel in sales commissions.
a. Suppose that Division 1 sells 7,500 units per month to outside customers. What is the lowest acceptable transfer price from the viewpoint of the selling division if Division 2 requires 5,000 units per month from Division 1?
b. What is the maximum price per wheel that Division 2 should be willing to pay Division 1 if a transfer were to take place?
c. Suppose that Division 1 sells 15,000 units each month to outside customers, what is the lowest acceptable transfer price from the viewpoint of the selling division?
Explanation / Answer
a. Since Division 1 has spare Capcity of 7,500 Units (15,000-7,500). Additional Units can be transferred at incremental cost/variable cost of $33 ($35-$2)
b. Division 2 is buying from outside at $47. Hence, maximum price division 2 is willing to pay is $47
c. SInce, Division 1 has no spare capacity, it would transfer at units at $48 ($50-$2)
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