Reference no: EM133023000

Question - Producers Limited has two (2) divisions, the Metro division and the Ultra Division. Currently the Metro Division sells a part (ARP601) on the market for $240 per unit. The Ultra Division wants to buy the part from the Metro Division for a price yet to be determined. The production capacity of the Metro Division is 12,000 units annually.

The cost per unit data (ARP 601) for the Metro Division is as follows: $

Direct Materials 60

Direct Labour 70

Variable Overhead 25

Fixed overhead 15

Required - Explain and calculate the transfer prices at which Metro Division should offer to transfer the part to the Ultra Division in order that the group profit maximizing decisions may be taken on financial grounds in each of the following independent situations:

(a) The Metro Division has no spare capacity and the Ultra Division wants to purchase 6000 units.

(b) Metro Division has excess capacity to supply all parts needed by the Ultra Division.

(c) Metro Division has excess capacity for only 3,000 of the total 5,000 parts needed by the Ultra Division. However, the Ultra Division has an alternative use of this excess capacity which provides to a contribution of $6 for each part.