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Alex Company has two independent business divisions - XYZ and MNO. XYZ Division currently buys a component from outside suppliers for $10 per unit. Current needs of the component total 10,000 units per month. MNO Division produces the component and would like to supply XYZ Division if an appropriate price can be determined.
The Management Accountant of MNO Division has calculated the following costs of the component:
Costs data (per unit)
Direct Materials $5.50
Direct Labour $1.50
Variable overhead $1.25
Fixed overhead $1.75
Total unit cost $12.00
MNO Division currently produces and sells 55,000 units each month to other companies at an average selling price of $15 per unit. MNO has an overall capacity to produce 100,000 units per month.
Required:
Question 1. What is the minimum transfer price for MNO Division? Show calculations.
Question 2. What is the maximum transfer price for XYZ Division? Show calculations.
Question 3. What would be in the best interest for the overall company? Explain.
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