The Rolling Parts Division of Delk Company plans to set up a facility with the capacity to make 20,000 units annually of a webcam for laptop computers. The avoidable cost of making the webcam is as follows:
Costs Total Cost per Unit
Variable cost....... $200,000............................... $10
Fixed cost........... 300,000.................. 15 (at capacity)
Required
a. Assume that Delk's Langford Division is currently purchasing 12,000 of the same type of webcam each year from an outside supplier at a market price of $30. What would be the financial consequence to Delk if the Rolling Parts Division makes the webcam and sells it to the Langford Division? Does a reasonable range of transfer prices exist? If so, what is the range?
b. Suppose that the Langford Division increases production so that it could use 20,000 webcams made by the Rolling Parts Division. How would the change in volume affect the range of transfer prices that would financially benefit both divisions?