Collyer Products Inc. has a Valve Division that manufactures and sells a standar

Question

Collyer Products Inc. has a Valve Division that manufactures and sells a standard valve as follows:

Collyer Products Inc. has a Valve Division that manufactures and sells a standard valve as follows Capacity in units Selling price to outside customers on the intermediate market Variable costs per unit Fixed costs per unit (based on capacity) 280,000 $21 $12 $ 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 12,000 valves per year from an overseas supplier at a cost of $20 per valve. Required.: 1. Assume that the Valve Division has ample idle capacity to handle all of the Pump Division's needs. What pecebeatn ihe wo dinhe is the acceptable range, if any, for the transfer price between the two divisions? Transfer price 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? Transfer price

Explanation / Answer

Inhouse Outside Capacity(Units)             2,80,000 12000 20 Selling Price P/U)                         21 variable Cost(P/U)                         12 Contribution (P/U)                           9 Fixed Cost 280000*9          25,20,000 1 Acceptable Price rage Since the company has ample idle capacity to handle the requiredment company contribution per unit is 9 per unit, fixed cost in any way company will be incurred even company does not able to sell a single unit it should not be taken at the time of decesion making So transfer price range should be between>=12 to=< 20 2 If it is able to sell all its product to outside customer then price should not be less than the price at which it can sell to outside customer i.e. 21 per unit Since other division is buying at lesser price, valve division should offer>= $21 per unit to Pump division No price range 3 If Valve division sell to pump division Total Cost 21 Less: Saving in VC 3 Net Cost 18 So price range should be in between>= 18 to =

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