Reference no: EM132971316

The Tour-d-World Company manufactures and sells racing bicycles. Its Assembly Division (AD) buys bicycle frames from the Frame Division (FD) and assembles the racing bicycles. The FD, which is operating at capacity, incurs an incremental manufacturing cost of $80 per frame. The FD can sell all its output to the outside market at a price of $ 120 per frame, after incurring a variable marketing and distribution cost of $5 per screen. If AD purchases frames from outside suppliers at a price of $120 per frame, it will incur a variable purchasing cost of $3 per frame. Tour-d- World's division manager can act autonomously to maximize their own division's operating income.

Required:

Problem 1. What is the minimum transfer price at which the FD manager would be willing to sell frames to the AD?

Problem 2. What is the maximum transfer price at which the AD manager would be willing to purchase frames from FD?

Problem 3. Now suppose that FD can sell only 80% of its output capacity of 10,000 frames per month on the open market. Capacity cannot be reduced in the short run. The AD can assemble and sell more than 10,000 racing bicycles per month.

a. What is the minimum transfer price at which the FD manager would be willing to sell frames to the AD?

b. From the point of view of Tour-d-World's management, how much of the FD output should be transferred to the AD?

Problem 4. The Tour-d-World's main competitor does not manufacture their bicycle frames. They purchase the frames from outside suppliers for their Assembly Division. Do you believe that this difference in operations gives either Tourd-World or their competitor a pricing advantage over the other? Explain your answer.