Reference no: EM132996142

Question - An internal restructuring operation is envisaged for an industrial company whose activity is organized around two business units B1 and B2, both having a profit center status.

Unit B1 manufactures and markets P1 parts.

The quantity sold on the external market is 1,800 units at the market unit price of €1,200.

The production capacity is 2,400 units.

The unit production costs for P1 at full capacity are €760, of which €520 are variable costs and €240 are fixed costs per unit (for a production of 2,400 units).

The units sold on the external market (and only those) generate a variable marketing cost of 20 € per unit.

Unit B2 manufactures and markets R1 motors. It is envisaged that it will also manufacture a new R2 engine, which would be made from P1 parts supplied by unit B1.

The new R2 motor could be sold for €2,000 per unit on the external market. The management control department has estimated the additional cost of manufacturing R2 by B2 at €600 per unit for the variable part and €240,000 in total for the fixed part. B2 estimates that it could sell 600 units of R2. It would take one part P1 to manufacture one R2 engine.

The transfer price considered for the transfer of P1 parts by B1 to B2 would correspond to the current market price, i.e. €1,200.

a) Is it in the company's interest to manufacture R2? Estimate the financial impact for the company.

b) Does the proposed transfer price allow for a convergence of interests between the two units and the company as a whole? 

c) Determine the limits of the transfer price so that it is acceptable to both B1 and B2.