Question

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 $0.75; full cost is $1.00. Com-parable widgets sell on the open market for $1.50 each. Division A can produce up to 2 million widgets per year but is currently operating at only 50 percent capacity. Division B expects to use 100,000 widgets in the current year.

Required:
1. Determine the minimum and maximum transfer prices.
2. Calculate Tulip Company’s total benefit of having the widgets transferred between these divisions.
3. If the transfer price is set at $0.75 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.
4. If the transfer price is set at $1.50 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.
5. What transfer price would you recommend to split the difference?



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  • CreatedFebruary 27, 2015
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