Collyer Products Inc. has a Valve Division that manufactures and sells a standar
ID: 2574148 • Letter: C
Question
Collyer Products Inc. has a Valve Division that manufactures and sells a standard valve as follows:
(for question 1, 2 and 3 please write >,<, in each box two and three)
3 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) 180,000 S 24 $ 17 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 18,000 valves per year from an overseas supplier at a cost of $23 per valve Required: 1. Assume that the Vave Diision has ample idle capacity to handle all of the Pump Division's needs What 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 3. Assume again that the Valve Division is selling all that it can produce to outside customers on the intermediate market. Also assume that $4 in variable expenses can be avoided on transfers within the company, due to reduced selling costs. What is the acceptable range, if any, for the transfer price between the two divisions? Transfer price 4. Assume the Pump Division needs 32,000 special high-pressure valves per year. The Valve Division's variable costs to manufacture and ship the special valve would be $12 per unit. To produce these special valves, the Valve Division would have to reduce its production and sales of regular valves from 180,000 units per year to 100,000 units acceptable transfer price? (Round your answer to 2 decimal places.) ear. As far as the Valve Division is concerned, what is the lowest Transfer priceExplanation / Answer
Answer:
1. If Valve division has Idle capacity it can transfer the valve at any price more than its variable cost i.e. $ 17 because ultimately it will make addition to its contribution so the Range become 17 23 *
* Because at more than $23 Pump department will not be ready to buy from valve and buy it from outside at $23.
2.If Valve division does not has Idle capacity it can transfer the valve at its variable cost + contribution lost for one unit if sold to internal department i.e. $ 17 + (24-17) = $24 So it can only transfer at 24 $ but at the same amount Pump will not buy from them rather they will buy it from outside so the answer is 24 $ . Range become 24 to 24 only.
3.If Valve division does not has Idle capacity but can save $ 4 from variable cost then it can transfer the valve at its variable cost + contribution lost- saving in variable cost for one unit if sold to internal department i.e. $ 17 + (24-17) -4= $20. Range become 20 23 *
* Because again at more than $23 Pump department will not be ready to buy from valve and buy it from outside at $23.
4.Lowest Transfer price the No loss No profit situation viz is follows
Variable Cost per unit+Contribution lost for manufacturing one special high pressure valve.
Variable cost = $12
*Contribution lost for manufacturing one special high pressure valve =560000/32000= 17.5 $
So Lowest Transfer Price is 17.5+12= 29.5 $
*Note :
Total Contribution Lost = 24-17 = $ 7 * (180000-100000) = $560000
No of unit of high pressure valve = 32000 units