Exercise 816 Crede Inc has two divisions Division A makes an

Exercise 8-16

Crede Inc. has two divisions. Division A makes and sells student desks. Division B manufactures and sells reading lamps.

Each desk has a reading lamp as one of its components. Division A can purchase reading lamps at a cost of $10 from an outside vendor. Division A needs 10,000 lamps for the coming year.

Division B has the capacity to manufacture 50,000 lamps annually. Sales to outside customers are estimated at 40,000 lamps for the next year. Reading lamps are sold at $12 each. Variable costs are $7 per lamp and include $1 of variable sales costs that are not incurred if lamps are sold internally to Division A. The total amount of fixed costs for Division B is $80,000.

Consider the following independent situations.



What should be the minimum transfer price accepted by Division B for the 10,000 lamps and the maximum transfer price paid by Division A? (Round answers to 2 decimal places, e.g. 10.50.)

Minimum transfer price accepted by Division B $
per unit
Maximum transfer price paid by Division A $
per unit

Suppose Division B could use the excess capacity to produce and sell externally 15,000 units of a new product at a price of $7 per unit. The variable cost for this new product is $5 per unit. What should be the minimum transfer price accepted by Division B for the 10,000 lamps and the maximum transfer price paid by Division A? (Round answers to 2 decimal places, e.g. 10.50.)

Minimum transfer price accepted by Division B $
per unit
Maximum transfer price paid by Division A $
per unit

If Division A needs 15,000 lamps instead of 10,000 during the next year, what should be the minimum transfer price accepted by Division B and the maximum transfer price paid by Division A? (Round answers to 2 decimal places, e.g. 10.50.)

Minimum transfer price accepted by Division B $
per unit
Maximum transfer price paid by Division A $
per unit

Solution

Case 1 There is excess capacity of 10,000 lamps with division B Variable cost             7.00 Irrelevant cost           (1.00) Relevant variable cost             6.00 Minimum price acceptable to division B             6.00 Maximum price payable by division A- Paid to outside vendor          10.00 Case 2 Division B is producing new products New product contribution (7-5)             2.00 New product count 15,000.00 New contribution 30,000.00 Excess capacity to be used for lamps 10,000.00 Contribution lost per lamp             3.00 Minimum price acceptable to division B (6+3)             9.00 Maximum price payable by division A- Paid to outside vendor          10.00 Case 3 Regular Production lost     5,000.00 New product production lost 15,000.00 New product contribution (7-5)             2.00 New product count 15,000.00 New contribution lost 30,000.00 Regular product contribution lost (12-6)             6.00 Regular Production lost     5,000.00 Regular contribution lost 30,000.00 Total contribution lost 60,000.00 Units 15,000.00 Contribution lost per lamp             4.00 Variable cost             6.00 Minimum price acceptable to division B          10.00 Maximum price payable by division A- Paid to outside vendor          10.00