The company has a Pump Division that could use this valve in the manufacture of
ID: 2574439 • Letter: T
Question
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 16,000 valves per year from an overseas supplier at a cost of $19 per valve.
Assume that the Valve Division 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?
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?
Assume again that the Valve Division is selling all that it can produce to outside customers on the intermediate market. Also assume that $2 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?
Assume the Pump Division needs 40,000 special high-pressure valves per year. The Valve Division's variable costs to manufacture and ship the special valve would be $10 per unit. To produce these special valves, the Valve Division would have to reduce its production and sales of regular valves from 160,000 units per year to 80,000 units per year. As far as the Valve Division is concerned, what is the lowest acceptable transfer price? (Round your answer to 2 decimal places.)
Collyer Products Inc. has a Valve Division that manufactures and sells a standard valve as follows:Explanation / Answer
1.
Minimum transfer price for the Valve division = Variable cost per unit
Minimum transfer price for the Pump division = Purchase cost
The acceptable range for the transfer price between the two divisions, when there is idle capacity is between the variable cost and the purchase cost.
Acceptable range = 12 - 19.
2.
Minimum transfer price in case of no excess capacity to valve division should be more than the selling price to outside customers which is 20
As the Pump division can purchase from the outside supplier at 19 per valve, Pump division would get benefited by purchseing from an outside supplier.
Acceptable range = None.
3.
As $2 in variable expenses can be avoided on transfers within the company, due to the reduced selling costs, the total variable costs = 12 - 2 = 10
As there is no excess capacity the minimum transfer price = Variable cost + Fixed cost = 10 + 9 = 19
There is no acceptable range for the transfer price between the two divisions. But the minimum transfer price acceptable for both the divisions = 19.
4.
The Valve Division's variable costs to manufacture and ship the special valve = 10 per unit
Contribution margin from the lost sales = Reduction in units * (selling price - variable costs)
= 80,000 * (20 - 12)
= 640,000
Relavent costs = Variable costs + Contribution margin from the lost sales
= (40,000 * 10) + 640,000 = 1,040,000
Lowest acceptable transfer price for the valve division = Relavent costs / No of units
= 1,040,000 / 40,000
= 26 per unit.