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Calculate the minimum transfer price

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Reference no: EM133032663

Question - Cortez Enterprises has two divisions: Birmingham and Tampa. Birmingham currently sells a diode (semiconductor device) reducer to manufacturers of aircraft navigation systems for $775 per unit. Variable costs amount to $500, and demand for this product currently exceeds the division's ability to supply the market place.

Despite the situation, Cortez is considering another use for the diode reducer, namely, integration into a satellite positioning system that would be made by Tampa. The positioning system has an anticipated selling price of $1,400 and requires an additional $670 of variable manufacturing costs. A transfer price of $750 has been established for the diode reducer.

Top management is anxious to introduce the positioning system; unless the transfer is made, an introduction will not be possible because of the difficulty of obtaining needed diode reducers. Birmingham and Tampa are in the process of recovering from previous financial problems, and neither division can afford any future losses. The company uses responsibility accounting and ROI in measuring divisional performance, and awards bonuses to divisional management.

REQUIRED -

1. How would Birmingham's divisional manager likely react to the decision to transfer the diode reducer to Tampa?

2. How would Tampa's divisional management likely react to the $750 transfer price?

3. Assume that a lower transfer price is desired. Should top management lower the price or should the price be lowered by another means? Explain.

4. From a contribution margin perspective, does Cortez benefit more if it

(i) sells the diode reducers externally or

(ii) transfers the reducers to Tampa? By how much? [Show computations to support your answer]

5. Assuming the transfer price of $750 was not established, calculate the minimum transfer price that Birmingham will be willing to change Tampa division? What is the maximum price for diode reducer?

Reference no: EM133032663

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