Heartland Engines is a division of EverGreen Lawn Equipment Company. Heartland makes engines for lawn mowers, snow blowers, and other types of lawn and garden equipment. It sells its engines to the company's lawn mower division and snow blower division, as well as to other lawn equipment companies. It was recently approached by the manager of the lawn mower division with a request to make a special high-performance engine for a lawn mower designed to mow heavy brush. The lawn mower division has asked Heartland to produce 8,500 units of this special engine. The following facts relate to Heartland Engines:
Selling price of standard lawn mower engine ...................$88
Variable cost of standard lawn mower engine....................55
Additional variable costs of special engine........................41
Instructions
For each of the following independent situations, calculate the minimum transfer price, and discuss whether the internal transfer should take place or whether the lawn mower division should purchase its goods externally:
(a) The lawn mower division has offered to pay Heartland Engines $110 per engine. Heartland Engines has no available capacity. Heartland Engines would have to cancel sales of 8,500 units to existing customers in order to meet the lawn mower division's request.
(b) The lawn mower division has offered to pay Heart land Engines $170 per engine. Heart land Engines has no available capacity. It would have to cancel sales of 12,000 units to existing customers in order to meet the lawn mower division's request.
(c) The lawn mower division has offered to pay Heart land Engines $110 per engine. Heart land Engines has available capacity.