BMM company's small parts Division, located in Edmonton, produces a small valve used by other companies as a specialized part in their products. To produce the valves, special machinery is used that must be calibrated appropriately, otherwise the valves produced are defective. They are presently selling 35,500 valves per year to outside customers and have a capacity of 40,000 valves per year. Cost and sales data related to the valves are given below: Selling price per unit: $50 Variable costs per unit: $30 Fixed costs per unit: $12 Based on the small parts division budget of 34,000 valves per year BMM Company's heavy truck division, also located in Edmonton, and is introducing a new product, the Manster. The manster will use a valve like the one produced in the Small Parts division. The Heavy trucks division estimates they will produce and sell 6,000 mansters each year with two valves required per manster. The heavy truck division has a capacity to produce 7,500 mansters each year. An outside supplier has quoted the Heavy Trucks Division a price of $48 per valve. This cost would include shipping cost as the supplier is located in Manila. The Heavy Trucks Division would like to purchase the valves from the Small Parts Division instead if an acceptable transfer price can be worked out but they have to be able to purchase all the required valves from one source.. 

a) calculate the minimum and maximum transfer price (PER UNIT)

b) from the standpoint of the entire company, what is the incremental benefit or loss to the company if the small parts division supplies the heavy trucks division with the requires valves per year? Should a transfer take place? 

c) now assume that there is no information given about how many valves small parts division is currently producing, and selling to outside customers (that is, ignore the 35,500 in the problem) What is the minimum excess capacity required in the small parts division for an internal transfer of valves for 6,000 mansters to take place?

Answer rating: 100% (QA)

Quiz a The minimum transfer price would be the total variable cost per unit plus a fair share of th... View the full answer