Division A makes watzits. The company has sufficient capacity to make 70,000 wat
ID: 2797948 • Letter: D
Question
Division A makes watzits. The company has sufficient capacity to make 70,000 watzits per year. The company expects to sell 65,000 watzits this year. Division B uses watzits in their production and has total needs of 20,000 watzits this year. Division B is currently buying watzits from an outside supplier for $11.25 each. The cost to Division A to make the watzits are $5.00 for direct materials, $2.00 for direct labor, $2.50 for variable manufacturing overhead, and $1.50 for fixed manufacturing overhead. Direct labor is a variable cost. Division A sells watzits on the outside market for $11.50 each.
Assuming that Division B buys its entire 20,000 requirement of watzits from Division A, is it possible for Division A and Division B to agree to a mutually acceptable transfer price and if so, within what range would that transfer price be?
Explanation / Answer
Minimum transfer price is decided by the transferring division which is division A, and the price is variable cost of making
Maximum transfer price is decided by the receiving division which is division B, and it is the price at which it can buy from outside
If division B wants to buy all 20000 from division A the beneficial price will be:
Lowest price: variable cost for division A for making:
Highest price: Price at which division B can buy from outside supplier= 11.25
Price range= 9.5- 11.25
Division A Direct material 5 Direct labor 2 Variable overhead 2.5 Total variable costs 9.5