Reference no: EM132566886

Yuseco Company's Division A produces a small toll used by other companies as a key part in their products. Cost and sales data relating to the small tool are given below:

Selling price per unit P50

Variable costs per unit P30

Fixed costs per unit* P12

*Based on A division's capacity of 40,000 tolls per year. The company's Division B is introducing a new product that will use a tool such as the one produced by Division A. An outside supplier has quoted the Division B a price of P48 per tool. Division B would like to purchase the tools from Division A, if an acceptable transfer price can be worked out.

REQUIRED:

Question 1. Determine the lower limit of the transfer price assuming that:

A. Division A has ample idle capacity to handle all the Division B's needs

B. Division A is presently selling all the tools it can produce to outside customers.

Question 2. From the standpoint of the entire company, should the Division B purchase the tools from the Division A (operating at full capacity) or from outside supplier? Why?

Question 3. Assume that the Division B requires 10,000 tools per year and the Division A is presently selling 36,000 tools per year to outside customers:

A. Determine the lower limit of the transfer price.

B. What would be overall effect on company profits if all 10,000 tools were acquired from the Division A rather that from the outside suppliers?