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Determine what is range of transfer prices

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Reference no: EM132581050

Geneva Corporation has a Castings Division that does casting work of various types. The company's Machine Products Division has asked the Casting Division to provide it with 10,000 special castings each year on a continuing basis. The special castings would require $20 per unit in variable production costs. The Machine Products Division has a bid from an outside supplier of $30 per unit for the castings.

  • In order to have time and space to produce the new castings, the Castings Division would have to cut back production of another casting: the NW2 which it presently is producing. The NW2 sells for $40 per unit, and requires $25 per unit in variable production costs. Boxing and shipping costs of teh NW2 are $4 per unit. Boxing and shipping costs for the new special casting would be only $2 per unit. The company is now producing and selling 100,000 units of the NW2 each year. Production and sales of this casting would drop by 10% if the new casting were produced.

Required:

Question (a) What is the range of transfer prices, if any, within which both the divisions' profits would increase as a result of agreeing to the transfer of 10,000 castings per year from the Castings Division to the Machine Products Division?

Question (b) Is it in the best interest of Geneva Corporation for this transfer to take place? How much could the company gain/lose from this transfer?

Reference no: EM132581050

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