Question

10.00 points Tulip Company is made up of two divisions: A and B. Division A produces a widget that Division B uses in the production of its product. Variable cost per widget is $1.55; full cost is $2.80. Comparable widgets sell on the open market for $3.30 each. Division A can produce up to 3.00 million widgets per year but is currently operating at only 50 percent capacity. Division Bexpects to use 150,000 widgets in the current year Required: 1. Determine the minimum and maximum transfer prices. (Enter your answers to 2 decimal places.) Minimum Transfer Price Maximum Transfer Price 2. Calculate Tulip Company's total benefit of having the widgets transferred between these divisions. 3. If the transfer price is set at S$1.55 per unit, determine how much profit Division A will make on the transfer. Determine how much Division B will save by not purchasing the widgets on the open market. (Round your answers to 2 decimal places.) Division A Profit per Unit per Unit Division B Savings 4. If the transfer price is set at S53.30 per unit, determine how much profit Division A will make on the transfer. Determine how much Division B will save by not purchasing the widgets on the open market. (Round your answers to 2 decimal places.) Division A Profit per Unit Division B Savings per Unit 5. What transfer price would you recommend to split the difference? (Round your answer to 3 decimal places.) nsfer Price

Answer 1

ANSWER:-

1. The minimum transfer price would be the variable cost per widget that is $1.55 and the maximum transfer price would be the price at which the widget is available in the ope market that is $3.30.

Minimum Transfer prices = $1.55

Maximum Transfer prices = $3.30

2.

Market price of 150,000 widgets = $1.55 x 150,000

= $232,500

Transfer price of 150,000 widgets = $3.30 x 150,000

= $495,000

Profit to the company = $232,000 - $495,000

= $-263,000

3. If the transfer price is set at $3.30, Division A would not make any profit because that would be trasferring the widgets at its variable cost.

Variable cost per widget = $3.30

Transfer price = $3.30

Profit to Division A = $3.30 - $3.30

  = $0

4. If the widgets are transferred at a price of $1.55 from Division A to B, Division A will make a profit of $3.30 per widget that is the difference between the transfer price of a widget and the variable cost per widget.

Therefore, when 150,000 widgets are transferred at $1.55 from Division A to Division B, total profit to Divsion A would be $-263,000 ($3.30 x150,000).

Transfer price = $3.30

Price in open market = $3.30

Savings to Division B = $3.30 - $3.30

   = $0

5.Transfer price recommend split difference = $3.30+$3.30/2

=$4.95

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