Question

The Rolling Parts Division of Delk Company plans to set up a facility with the capacity to make 20,000 units annually of a webcam for laptop computers. The avoidable cost of making the webcam is as follows.

Costs	Total			Cost per Unit
Variable cost	$	200,000		$	10
Fixed cost		300,000			15	(at capacity)

Required

1. a-1. Assume that Delk’s Langford Division is currently purchasing 12,000 of the same type of webcam each year from an outside supplier at a market price of $30. What would be the financial consequence to Delk if the Rolling Parts Division makes the webcam and sells it to the Langford Division?

2. a-2. Does a reasonable range of transfer prices exist?

3. b. Suppose that the Langford Division increases production so that it could use 20,000 webcams made by the Rolling Parts Division. How would the change in volume affect the range of transfer prices that would financially benefit both divisions?

Answer 1

ANSWER:

(a) as given in part a

variable cost (12000*10) 120000

Fixed cost (at capacity) 300000

Total Cost 420000

Cost per unit 25

So the Profit of Young enterprise as a whole increase by (30-25)*12000 = $ 60000

reasonable range of transfer prices exist is 25 and 30.

(b) if Langford division produces 20000 webcams operate full capacity

particulars	Amt in $
Variable cost (20000*10)	200000
Fixed cost	300000
Total Cost	500000
Cost per unit	25
Max. Sale Price per unit	30
Max. Profit Per unit	5

Transfer Price range which financially benefits division from min. to max. 25 and 30

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