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?