The Abiyu Shoe Company has two divisions, Production and Marketing. Production manufactures Abiyu shoes, which it sells to both the Marketing Division and to other retailers (the latter under a different brand name). Marketing operates several small shoe stores in shopping centers. Marketing sells both Abiyu and other brands.

Relevant facts for Production are as follows:

Production is operating far below its capacity.

Sales Price to Outsiders.............................................................$28.50 per Pair

Variable Cost to Produce...........................................................$18.00 per Pair

Fixed Costs ................................................................................$100,000 per Month

The following data pertain to the sale of Abiyu shoes by Marketing:

Marketing is operating far below its capacity.

Sales Price....................................................................................$40 per Pair

Variable Marketing Costs.............................................................$1 per Pair

The company’s variable manufacturing and marketing costs are differential to this decision, while fixed manufacturing and marketing costs are not.

Required:

a. What is the type of responsibility center for Production and Marketing division?

b. What is the minimum price that can be charged by the Marketing Division for the shoes and still cover the company’s differential manufacturing and marketing costs?

c. What is the appropriate transfer price for situation in (b)?

d. If the transfer price is set at $28.50, what effect will this have on the minimum price set by the Marketing manager?

e. How would your answer to question (b) change if the Production Division was operating at full capacity?

Answer rating: 100% (QA)

Solution a Both production and marketing divisions are profit centers since they are managing cost a... View the full answer