National Company has two divisions, Walton and Iowa. Walton produces an item that Iowa could use in its production. Iowa currently is purchasing 50,000 units from an outside supplier for $9.10 per unit. Walton has sufficient capacity and has variable costs of $5.25 per unit. The full cost to manufacture the unit is $7.70. Walton currently sells 450,000 units at a selling price of $9.80 per unit.a. What will be the effect on National Company's operating profit if the transfer is made internally?b. What will be the change in profits for Walton if the transfer price is $7 per unit?c. What will be the change in profits for Iowa if the transfer price is $7 per unit?
What will be an ideal response?
a. $192,500 more profit = 50,000 × ($9.10 - $5.25)
b. $87,500 more profit = 50,000 × ($7 - $5.25)
c. $105,000 more profit = 50,000 × ($9.10 - $7)
Profit for the firm will increase by the difference between the variable cost to manufacture and the market price to purchase. Profit for the selling division will increase by the difference between the variable cost to manufacture and the transfer price. Profit for the buying division will increase by the difference between the transfer price and the market price to purchase.
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