Reference no: EM131918457
PROBLEM - Kessler Enterprises manufactures computer monitors in its Video Division. These monitors can be sold internally to the EDD Division of Kessler or externally to independent customers. Sales and costs for the most popular monitor manufactured by the Video Division are as follows.
Per unit Selling Price $135
Per unit Variable Cost $102
Per unit Fixed Cost [based on full production capacity] $ 28
Full monthly production capacity 10,000 units
A. The Video Division of Kessler plans to sell 96,000 of these monitors to outside customers in the coming year. The EDD Division of Kessler needs and has been buying 20,000 identical monitors per year from an outside supplier at a price of $135.
1. What is the minimum transfer price for the monitor that the Video Division should be willing to accept on an internal transfer?
2. What is the maximum transfer price the EDD Division should be willing to pay for these monitors?
3. If the two divisions agree to a transfer price of $125 per monitor, calculate the effect on each division's net income for the year.
B. Now assume the Video Division of Kessler plans to sell 115,000 of these monitors to outside customers in the coming year. The EDD Division needs and has been buying 20,000 identical monitors per year from an outside supplier at a price of $135. The Video Division can eliminate $12 per monitor of variable costs on any transfers to the EDD Division because no sales commissions will be paid on any monitors sold to the EDD Division.
1. If the two divisions agree to a transfer price of $120 per monitor, calculate the effect on each division's net income for the year.
2. What is the minimum transfer price for the monitor that the Video Division should be willing to accept on an internal transfer?
C. List at least three qualitative factors that should be considered when deciding whether the Video Division should sell computer monitors to the EDD Division of Kessler Enterprises.