Question: PLEASE SHOW STEP BY STEP Problem 2) Europa Inc. has two divisions, Division-S and Division-B, that manufacture expensive bicycles. Division-S produces the bicycle frame, and

PLEASE SHOW STEP BY STEP

Problem 2) Europa Inc. has two divisions, Division-S and Division-B, that manufacture expensive bicycles. Division-S produces the bicycle frame, and Division-B assembles the rest of the bicycle onto the frame. There is a market for both the subassembly and the final product. Each division has been designated as a profit center. The transfer price for the subassembly has been set at the long-run average market price. The following data are available for each division.

Selling price for bicycle product $300 per unit

Long-run average selling price for frame in the market ..... $200 per unit

Incremental cost per unit for Division B $150 per unit

Incremental cost per unit in Division S.. $120 per unit

The manager of Division-B made the following calculation:

Selling price per bicycle.$300

Transferred-in cost per unit (market)..$200

Incremental cost per unit for completion..$150

Contribution Margin $(50)

Required)

1. Should transfers be made to Division-B if there is no unused capacity in Division-S? Is the market price the correct transfer price?

2. Assume that Division-Ss maximum capacity for this product is 1,000 units per month and sales to the intermediate market are now 800 units. That is, Division-S has 200 units of unused capacity.

2a.Should 200 units be transferred to Division-B? At what transfer price?

2b. What is the minimum transfer price Division-S will accept for 200 units? If Division-S agrees to transfer 200 units to Division-B at $120 transfer price, what is the total contribution margin to the company as a whole?

2c. What is the maximum transfer price Division-B will pay for the 200 units? What would be the contribution to the company as a whole if a transfer were made at the maximum price Division-B is willing to pay?

3. What is the minimum and maximum transfer for 300 units and the corresponding contribution margin for the company as a whole?

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