83. Cascade Cliffs, Inc., operates two divisions: (1) a management division that owns and
manages bulk carriers on the Great Lakes and (2) a repair division that operates a dry dock in
Cheboygan, Michigan. The repair division works on company ships, as well as other large-hull
ships.
The repair division has an estimated variable cost of $37 per labor-hour. The repair division has a
backlog of work for outside ships. They charge $70.00 per hour for labor, which is standard for this
type of work. The management division complained that it could hire its own repair workers for
$45.00 per hour, including leasing an adequate work area.
If the repair division had idle capacity, what is the minimum transfer price that the repair division
should obtain?
84. You have been provided with the following information for Division Sell of a decentralized
company:
Division Buy would like to purchase all of its units internally. Division Buy needs 6,000 units each
period and currently pays $84 per unit to an outside firm. What is the lowest price that Division
Sell could accept from Division Buy? (Assume that Division Buy wants to use a sole supplier and
will not purchase less than 6,000 from a supplier.)
85. Given the following data for Division M:
Division T would like to purchase 15,000 units each period from Division M. Division M has ample
excess capacity to handle all of Division T’s needs. Division T now purchases from an outside
supplier at a price of $40. If Division M refuses to accept an $18 price internally, the company, as
a whole, will be worse off by:
86. When the selling division in an internal transfer has unsatisfied demand from outside
customers for the product that is being transferred, then the lowest acceptable transfer price as
far as the selling division is concerned is:
87. Division X makes a part that it sells to customers outside of the company. Data
concerning this part appear below:
Division Y of the same company would like to use the part manufactured by Division X in one of
its products. Division Y currently purchases a similar part made by an outside company for $70
per unit and would substitute the part made by Division X. Division Y requires 5,000 units of the
part each period. Division X can already sell all of the units it can produce on the outside market.
What should be the lowest acceptable transfer price from the perspective of Division X?
88. Part WY4 costs the Eastern Division of Tyble Corporation $26 to make – direct materials
are $10, direct labor is $4, variable manufacturing overhead is $9, and fixed manufacturing
overhead is $3. Eastern Division sells Part WY4 to other companies for $30. The Western Division
of Tyble Corporation can use Part WY4 in one of its products. The Eastern Division has enough
idle capacity to produce all of the units of Part WY4 that the Western Division would require. What
is the lowest transfer price at which the Eastern Division should be willing to sell Part WY4 to the
Central Division?
89. Division P of Turbo Corporation has the capacity for making 75,000 wheel sets per year
and regularly sells 60,000 each year on the outside market. The regular sales price is $100 per
wheel set, and the variable production cost per unit is $65. Division Q of Turbo Corporation
currently buys 30,000 wheel sets (of the kind made by Division P) yearly from an outside supplier
at a price of $90 per wheel set. If Division Q were to buy the 30,000 wheel sets it needs annually
from Division P at $87 per wheel set, the change in annual net operating income for the company
as a whole, compared to what it is currently, would be:
90. Division X makes a part that it sells to customers outside of the company. Data
concerning this part appear below:
Division Y of the same company would like to use the part manufactured by Division X in one of
its products. Division Y currently purchases a similar part made by an outside company for $49
per unit and would substitute the part made by Division X. Division Y requires 5,000 units of the
part each period. Division X has ample excess capacity to handle all of Division Y‘s needs without
any increase in fixed costs and without cutting into outside sales. According to the formula in the
text, what is the lowest acceptable transfer price from the standpoint of the selling division?
91. Division A makes a part that it sells to customers outside of the company. Data
concerning this part appear below:
Division B of the same company would like to use the part manufactured by Division A in one of
its products. Division B currently purchases a similar part made by an outside company for $38
per unit and would substitute the part made by Division A. Division B requires 5,000 units of the
part each period. Division A has ample capacity to produce the units for Division B without any
increase in fixed costs and without cutting into sales to outside customers. If Division A sells to
Division B rather than to outside customers, the variable cost be unit would be $1 lower. What
should be the lowest acceptable transfer price from the perspective of Division A?
92. The Milk Chocolate Division of Mmmm Foods, Inc. had the following operating results last
year:
Milk Chocolate expects identical operating results this year. The Milk Chocolate Division has the
ability to produce and sell 200,000 pounds of chocolate annually.
Assume that the Peanut Butter Division of Mmmm Foods wants to purchase an additional 20,000
pounds of chocolate from the Milk Chocolate Division. Milk Chocolate will be able to increase its
profit by accepting any transfer price above:
93. The Milk Chocolate Division of Mmmm Foods, Inc. had the following operating results last
year:
Milk Chocolate expects identical operating results this year. The Milk Chocolate Division has the
ability to produce and sell 200,000 pounds of chocolate annually.
Assume that the Milk Chocolate Division is currently operating at its capacity of 200,000 pounds
of chocolate. Also assume again that the Peanut Butter Division wants to purchase an additional
20,000 pounds of chocolate from Milk Chocolate. Under these conditions, what amount per pound
of chocolate would Milk Chocolate have to charge Peanut Butter in order to maintain its current
profit?
94. Division X makes a part with the following characteristics:
Division Y of the same company would like to purchase 10,000 units each period from Division X.
Division Y now purchases the part from an outside supplier at a price of $17 each.
Suppose Division X has ample excess capacity to handle all of Division Y’s needs without any
increase in fixed costs and without cutting into sales to outside customers. If Division X refuses to
accept the $17 price internally and Division Y continues to buy from the outside supplier, the
company as a whole will be:
95. Division X makes a part with the following characteristics:
Division Y of the same company would like to purchase 10,000 units each period from Division X.
Division Y now purchases the part from an outside supplier at a price of $17 each.
Suppose that Division X is operating at capacity and can sell all of its output to outside customers.
If Division X sells the parts to Division Y at $17 per unit, the company as a whole will be:
96. Division A produces a part with the following characteristics:
Division B, another division in the company, would like to buy this part from Division A. Division B
is presently purchasing the part from an outside source at $28 per unit. If Division A sells to
Division B, $1 in variable costs can be avoided.
Suppose Division A is currently operating at capacity and can sell all of the units it produces on
the outside market for its usual selling price. From the point of view of Division A, any sales to
Division B should be priced no lower than:
97. Division A produces a part with the following characteristics:
Division B, another division in the company, would like to buy this part from Division A. Division B
is presently purchasing the part from an outside source at $28 per unit. If Division A sells to
Division B, $1 in variable costs can be avoided.
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:
98. 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.
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?
99. 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.
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?
100. 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.
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:
101. 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.
According to the formula in the text, what is the lowest acceptable transfer price from the
viewpoint of the selling division?
15–80
102. 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.
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: