Question

Collyer Products Inc. has a Valve Division that manufactures and sells a standard valve as follows:

Capacity in units		280,000
Selling price to outside customers on the intermediate market		$ 21
Variable costs per unit		$ 12
Fixed costs per unit (based on capacity)		$ 9

The company has a Pump Division that could use this valve in the manufacture of one of its pumps. The Pump Division is currently purchasing 12,000 valves per year from an overseas supplier at a cost of $20 per valve.

1. Assume that the Valve Division has ample idle capacity to handle all of the Pump Division's needs. What is the acceptable range, if any, for the transfer price between the two divisions?

2. Assume that the Valve Division is selling all that it can produce to outside customers on the intermediate market. What is the acceptable range, if any, for the transfer price between the two divisions?

3. Assume again that the Valve Division is selling all that it can produce to outside customers on the intermediate market. Also assume that $3 in variable expenses can be avoided on transfers within the company, due to reduced selling costs. What is the acceptable range, if any, for the transfer price between the two divisions?

4. Assume the Pump Division needs 20,000 special high-pressure valves per year. The Valve Division's variable costs to manufacture and ship the special valve would be $11 per unit. To produce these special valves, the Valve Division would have to reduce its production and sales of regular valves from 280,000 units per year to 240,000 units per year. As far as the Valve Division is concerned, what is the lowest acceptable transfer price? (Round your answer to 2 decimal places.)

Answer 1

1	As the Valve division has idle capacity the minimum acceptable transfer for them would be its variable cost i.e. $12.
	Maximum acceptable transfer price for the Pump div. would be its outside purchase price i.e. $20.
	The acceptable range	$12 to $20
2	Here, as the valves are sold to intermediate market minimum acceptable transfer price for valve div. would be Variable cost + opportunity cost( contribution lost) i.e. $12 + $9 = $21.
	Maximum acceptable TP by Pump div. = its purchasing price i.e. $ 20
	There for no acceptable range.
3	Valve division mimimum TP = Varibale cost + contribution lost = (12-3)+9 = $18
	Maximum acceptable TP by pump div. = $20.
	The acceptable range	$18 to $ 20
4	Lowest acceptable transfer price
	Variable cost	$   11.00
	Contribution lost	$   18.00	=((280000-240000)*9)/20000
	Lowest TP	$   29.00

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