Indigo Inc. has two divisions. Division A makes and sells student desks. Division B manufactures and sells
Question:
Indigo Inc. has two divisions. Division A makes and sells student desks. Division B manufactures and sells reading lamps.
Each desk has a reading lamp as one of its components Division A can purchase reading lamps at a cost of $10 from an outside vendor. Division A needs 12,000 lamps for the coming year.
Division B has the capacity to manufacture 60,000 lamps annually., Sales to outside customers are estimated at 48,000 lamps for the next year. Reading lamps are sold at $12 each. Variable costs are $7 per lamp and include $2 of variable sales costs that are not incurred if lamps are sold internally to Division A. The total amount of fixed costs for Division Bis $96,000.
Suppose Division B could use the excess capacity to produce and sell externally 18,000 units of a new product at a unit selling price of $7. The unit variable cost for this new product is $5.What should be the minimum transfer price accepted by Division B for the 12,000 lamps and the maximum transfer price paid by Division A?
