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 follow (for question 1, 2 and 3 please write, in each box two and three) 3 Ca yer Products Inc has aVah·Dison that raudactres and sells a standard ve as folows Capacity in units Selling price to outside customers on the intermediate market Vaniable costs Foxed costs per unit (based on capacity) s 24 S 14 The company has a Pump Dhision thait could use this valve in the manufactune of one of its pumps. Thie Pump DiMision is cumrently purchasing 18,000 valves per year from an overseas supplier at a cest o $23 per valve 1. Assume that the Valve Division has ample idle capacity to handle all of the Pump Division's needs the acceptable range d any for the bans1er price between the two dmom? What 2. Assume that the Val" Diesion is seling th" can produce to outside customers on the intermediate market. What is the acceptable range, any, for the transfer price between the two divisions Assume again that the Vaive Division is selling all that tcan produce to ouitside customers on the rtemedate market Also assum, that S4 anable expenses can be noded on trasters uthn the company due to reduced selling costs what the acceptable range #any for the bander price between the two divisions? Assume the Pump Diision meeds 32.000 special high-pressure valkes per yea The Valve Disions variable costs to manufacture and ship the special valve would be $12 per unit. To produce these special valves, the Valve Diision would have to reduce its production and sales of reguar aes from 180 000 unts per year to 100 000 units per year As far as the Vah® Dvsois concerned what the lowest acceptable transfer price? (Round your answer to 2 decimal places

Explanation / Answer

Part 1)

We will have to calculate the lowest possible transfer price with the use of following formula:

Transfer Price > Variable Cost Per Unit + Contribution Margin on Lost Sales/Number of Units Transferred

Here, Variable Cost Per Unit = 17, Contribution Margin on Lost Sales = 0 (as the firm has idle capacity and there will be no loss of sales) and Number of Units Transferred = 18,000

Using these values in the above equation for transfer price, we get,

Transfer Price > 17 + 0/18,000 = $17

As the pump division would not be willing to pay $23 per valve (it is paying to outside suppliers) to valve division, the acceptable transfer price range would be $17 to $23.

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Tabular Representation:

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Part 2)

The transfer price will again be determined with the use of equation provided in Part 1) as below:

Transfer Price > Variable Cost Per Unit + Contribution Margin on Lost Sales/Number of Units Transferred

Here, Variable Cost Per Unit = 17, Contribution Margin on Lost Sales = 18,000*(24 - 17) = $126,000 (as the firm will lose some sales) and Number of Units Transferred = 18,000

Using these values in the above equation for transfer price, we get,

Transfer Price > 17 + 126,000/18,000 = $24

As the pump division can buy valves at a lower price of $23 from outside suppliers, there will be no agreement on the transfers between two divisions.

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Tabular Representation:

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Part 3)

The transfer price will again be determined with the use of equation provided in Part 1) as below:

Transfer Price > Variable Cost Per Unit + Contribution Margin on Lost Sales/Number of Units Transferred

Here, Variable Cost Per Unit = 17 - 4 = $13, Contribution Margin on Lost Sales = 18,000*(24 - 17) = $126,000 (as the firm will lose some sales) and Number of Units Transferred = 18,000

Using these values in the above equation for transfer price, we get,

Transfer Price > 14 + 126,000/18,000 = $21

As the pump division would not be willing to pay $23 per valve (it is paying to outside suppliers) to the valve division, the acceptable transfer price range would be $21 to $23.

____

Tabular Representation:

____

Part 4)

The transfer price will again be determined with the use of equation provided in Part 1) as below:

Transfer Price > Variable Cost Per Unit + Contribution Margin on Lost Sales/Number of Units Transferred

Here, Variable Cost Per Unit = $12, Contribution Margin on Lost Sales = (180,000 - 100,000)*(24 - 17) = $560,000 (as the firm will lose some sales) and Number of Units Transferred = 32,000

Using these values in the above equation for transfer price, we get,

Transfer Price > 12 + 560,000/32,000 = $29.50

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Tabular Representation:

$17 < Transfer Price < $23

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