Reference no: EM132568023
Question - The Atlantic Company is a multidivisional company. Its managers have full responsibility for profits and autonomy to accept or reject transfers from other divisions. Division A produces a sub-assembly part for which there is a competitive market. Division B currently uses this sub-assembly for a final product that is sold outside at $2,430. Division A charges division B market price for the part, which is $1,390 per unit. Variable costs are $1,030 and $1,180 for divisions A and B, respectively.
The manager of division B feels that division A should transfer the part at a lower price than market because, at market, division B is unable to make a profit.
Calculate division B's contribution margin if transfers are made at the market price, and calculate the company's total contribution margin.
Assume that division A can sell all its production in the open market. Should division A transfer the goods to division B?
Compare the contribution margins under three different alternatives. Assume that division A can sell in the open market only 550 of the 1,100 units it can produce every month, at $1,390 per unit. Assume also that a 20% reduction in price is necessary to sell all 1,100 units each month. Assume transfers are made and the price is maintained.
If so, how many units should the division transfer and at what price?
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