Reference no: EM133087310
Question - Parts Division and Assembly Division are two of the many divisions of E Electronics Inc.
Parts Division currently manufactures a circuit board, that is sold entirely to external customers.
Assembly Division currently manufactures a product that uses the circuit board. Assembly Division purchases the circuit board equivalent from an external supplier. Annual requirements of the circuit board by Assembly Division is 90,000 units.
Parts Division's variable manufacturing cost for each unit of circuit board is $ 15. In addition $ 3 of variable selling costs are incurred. Variable selling costs would not be incurred on internal transfers. Parts Division has a capacity of 400,000 units. The market price for a circuit board is $ 40 per unit (also equal to the price paid for a circuit board purchased by the Assembly Division.
a. Assume that Parts Division is currently at capacity, what is the lowest price at which the Parts Division would be willing to transfer a circuit board to the Assembly Division?
b. Independent to part (a), assume the Parts Division is selling 360,000 units annually, what would the benefit to E Electrnics Inc if a transfer were to take place between the 2 divisions?
c. In reference to Part (b), assume that a transfer price of $ 30 is negotiated, what is the incremental income to the Parts Division of making an internal transfer of 90,000 units to the Assembly Division?
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