Question

Grover Corp. is a manufacturing company that produces golf clubs. Birdie is a division of Grover that manufactures putters. Birdie’s putters are used in Grover’s golf club sets and are sold to other golf wholesalers. Cost information per putter follows:  

Variable cost	$25.00
Full cost	28.00
Market price	42.00

In addition, its capacity data follow:

Capacity per year	40,000 putters
Current production level	30,000 putters

Required:
1. Assuming Grover produces 3,000 putters per year, determine the overall benefit of using putters from Birdie instead of purchasing them externally.

	Total Savings

2. Determine the maximum price that the production facility would be willing to pay to purchase the putters from Birdie.

	Maximum price

3. Determine the minimum that Birdie will accept as a transfer price.

	Minimum price

4. Determine the mutually beneficial transfer price for the putters. (Round your answer to 2 decimal places.)

	Mutually Beneficial Price

5. If Birdie were operating at capacity, What would the minimum price it accept?

	Minimum price

Answer 1

1.

Market price per putter	$42
Less: Variable cost per putter	25
Savings per putter	$17
Total savings ( 3,000*$17)	$51,000

2.

Maximum price that production department is willing to pay to buy putters from birdie is the market price $42.

3.

Minimum price that birdie will accept as transfer price is the variable cost $25.

4.

Mutually beneficial transfer price for putters = variable cost + savings / 2 *

Mutually beneficial transfer price for putters = $25 + 17/2 = $33.5

* Cost savings of $17 will be shared equally between buyer and seller.

5.

Minimum price if birdie were operating at capacity will be market price $42.