Question

The Rimes Division of Walker Company currently produces electric fans that desktop computer manufacturers use as cooling components. The Curtice Division, which makes notebook computers, has asked the Rimes Division to design and supply 20,000 fans per year for its notebook computers. Curtice currently purchases notebook fans from an outside vendor at the price of $18 each. However, Curtice is not happy with the vendor’s unstable delivery pattern. To accept Curtice’s order, Rimes would have to purchase additional equipment and modify its plant layout. The additional equipment would enable the company to add 35,000 notebook fans to its annual production. Rimes’ avoidable cost of making 20,000 notebook fans follows:


Required
a. What would be the financial consequence to Walker Company if the Rimes Division makes the notebook fans and sells them to the Curtice Division? What range of transfer prices would increase the financial performance of both divisions?
b. Suppose the Curtice Division increases production so that it could use 30,000 Rimes Division notebook fans. How would the change in volume affect the range of transfer prices that would financially benefit bothdivisions?


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  • CreatedFebruary 07, 2014
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