One of the divisions in Milsap Manufacturing Company is the Camera Division. The Camera Division is developing a new product that would require a lens not commercially available. The Camera Division believes it can sell 40,000 units of the new product each year at a selling price of $120. Variable costs for the new product would be $60, not including the lens, and there will be $160,000 of incremental fixed costs associated with the product. The Camera Division does not have the expertise to make the lenses. Milsap Manufacturing Company has a Lens Division that could make the lenses and has sufficient idle capacity. It estimates the variable cost per unit would be $16 and incremental fixed costs would be $120,000 each year.Required:1) There are different bases that can be used in setting
transfer prices, including market prices. What basis should be used in this situation? 2) What is the maximum transfer price Camera Division should be willing to pay? Note that, without the lenses, the Camera Division cannot make and sell its new product. 3) What is the minimum transfer price that Lens Division should be willing to accept? 4) Should the transfer be made? If not, why not? If so, what transfer price (or range of transfer prices) would you recommend?
What will be an ideal response?
1) In this situation, a market-based transfer price cannot be used because there is no market price. A negotiated transfer price might be recommended, with the managers for the two divisions coming to an agreement.
2) The maximum transfer price would be $56 (the selling price of $120 for the new product minus the total existing cost for the new product of $64*).
3) The minimum transfer price that the Lens Division should be willing to accept is $19**, which would cover its variable and incremental fixed costs.
4) The transfer should be made because making and selling the Camera Division's new product will increase profits for Milsap Manufacturing Company by $1,480,000 ($37*** per unit × 40,000 units). Any transfer price that is between $19 and $56 is acceptable. It makes no difference to the company as a whole.
*$60 variable cost + ($160,000 ÷ 40,000) fixed cost = $64
**$16 variable cost + ($120,000 ÷ 40,000) incremental fixed cost
***$120 selling price ? [$76 variable cost + ($280,000 fixed cost ÷ 40,000)]
You might also like to view...
Which of the following is true about proper use of the term "countertrade"?
A) The term "countertrade" is interchangeable with "offsets." B) The term "countertrade" is interchangeable with "barter." C) The term "countertrade" is interchangeable with "counterpurchase." D) "Countertrade" is a blanket term that refers to several different types of business transactions. E) The term "countertrade" is interchangeable with "dumping."
The court system consists essentially of trial courts and appellate courts. Identify the most accurate statement
a. An appellate court is expected to review errors of factual analysis made by lower trial court juries. b. An appellate court decision only has value as precedent if the highest court makes the decision in the judicial system. c. The trial court judge presides over the trial and determines issues of law, and a jury makes findings of fact. d. A panel of three federal trial court judges hears any dispute where a money damage claim is made in excess of $50,000 . Called small claim diversity suits, the judges are authorized to decide issues of fact and law sans (without) jury.
Web analytics is the measurement, collection, analysis, and reporting of Internet data for the purposes of understanding and optimizing Web usage
Indicate whether the statement is true or false
The aim of ergonomics is to make it easier and safer for people to use tools and other objects
Indicate whether the statement is true or false