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12A-13
15. Suppose that Division A has ample idle capacity to handle all of Division B's needs
without any increase in fixed costs and without cutting into its sales to outside customers. From
the point of view of Division A, any sales to Division B should be priced no lower than:
The Post Division of the M.T. Woodhead Company produces basic posts which can be sold
to outside customers or sold to the Lamp Division of the M.T. Woodhead Company. Last year the
Lamp Division bought all of its 25,000 posts from Post at $1.50 each. The following data are
available for last year's activities of the Post Division:
The total fixed costs would be the same for all the alternatives considered below.
16. Suppose there is ample capacity so that transfers of the posts to the Lamp Division do
not cut into sales to outside customers. What is the lowest transfer price that would not reduce
the profits of the Post Division?
17. Suppose the transfers of posts to the Lamp Division cut into sales to outside customers
by 15,000 units. What is the lowest transfer price that would not reduce the profits of the Post
Division?
18. Suppose the transfers of posts to the Lamp Division cut into sales to outside customers
by 15,000 units. Further suppose that an outside supplier is willing to provide the Lamp Division
with basic posts at $1.45 each. If the Lamp Division had chosen to buy all of its posts from the
outside supplier instead of the Post Division, the change in net operating income for the company
as a whole would have been:
12A-17
The Pole Division of Hillyard Company produces poles which can be sold to outside
customers or transferred to the Flag Division of Hillyard Company. Last year the Flag Division
bought 50,000 poles from Pole at $2.50 each. The following data are available for last year's
activities in the Pole Division:
In order to sell 50,000 poles to the Flag Division, the Pole Division must give up sales of 30,000
poles to outside customers. That is, the Pole Division could sell 380,000 poles each year to
outside customers (rather than only 350,000 poles as shown above) if it were not making sales to
the Flag Division.
19. According to the formula in the text, what is the lowest acceptable transfer price from the
viewpoint of the selling division?
20. Suppose that last year an outside supplier would have been willing to provide the Flag
Division with the basic poles at $2.10 each. If Flag had chosen to buy all of its poles from the
outside supplier instead of the Pole Division, the change in net operating income for the company
as a whole would have been:
12A-20
21. Division X has asked Division K of the same company to supply it with 5,000 units of part
L433 this year to use in one of its products. Division X has received a bid from an outside supplier
for the parts at a price of $26.00 per unit. Division K has the capacity to produce 30,000 units of
part L433 per year. Division K expects to sell 26,000 units of part L433 to outside customers this
year at a price of $30.00 per unit. To fill the order from Division X, Division K would have to cut
back its sales to outside customers. Division K produces part L433 at a variable cost of $21.00
per unit. The cost of packing and shipping the parts for outside customers is $2.00 per unit.
These packing and shipping costs would not have to be incurred on sales of the parts to Division
X.
Required:
a. What is the range of transfer prices within which both the Divisions' profits would increase as
a result of agreeing to the transfer of 5,000 parts this year from Division X to Division K?
b. Is it in the best interests of the overall company for this transfer to take place? Explain.
12A-22
22. Leontif Corporation has a Parts Division that does work for other Divisions in the
company as well as for outside customers. The company's Equipment Division has asked the
Parts Division to provide it with 2,000 special parts each year. The special parts would require
$17.00 per unit in variable production costs.
The Equipment Division has a bid from an outside supplier for the special parts at $28.00 per
unit. In order to have time and space to produce the special part, the Parts Division would have to
cut back production of another part-the J789 that it presently is producing. The J789 sells for
$34.00 per unit, and requires $22.00 per unit in variable production costs. Packaging and shipping
costs of the J789 are $4.00 per unit. Packaging and shipping costs for the new special part would
be only $0.50 per unit. The Parts Division is now producing and selling 10,000 units of the J789
each year. Production and sales of the J789 would drop by 10% if the new special part is
produced for the Equipment Division.
Required:
a. What is the range of transfer prices within which both the Divisions' profits would increase as
a result of agreeing to the transfer of 2,000 special parts per year from the Parts Division to the
Equipment Division?
b. Is it in the best interests of Leontif Corporation for this transfer to take place? Explain.
