The Pacific Company is a multidivisional company. Its managers have full responsibility for profits and complete autonomy to accept or reject transfers from other divisions. Division A produces a sub-assembly part, for which there is a competitive market. Division B currently uses this sub-assembly for a final product that is sold outside at $3,400. Division A charges division B the market price for the part, which is $2,400 per unit. Variable costs are $2,040 and $1,200 for divisions A and B, respectively.
The manager of division B feels that division A should transfer the part at a lower price than market because, at market, division B is unable to make a profit.
Instructions
(a) Calculate division B's contribution margin if transfers are made at the market price, and calculate the company's total contribution margin.
(b) Assume that division A can sell all its production in the open market. Should division A transfer the goods to division B? If so, at what price?
(c) Assume that division A can sell in the open market only 500 of the 1,000 units it can produce every month, at $2,400 per unit. Assume also that it reduces the price to $2,120 as necessary to sell all 1,000 units each month. Should transfers be made? If so, how many units should the division transfer and at what price? To support your decision, submit a schedule that compares the contribution margins under three different alternatives.