Answer:
1. Minimum transfer price to Parts: $3.64 per filter
Maximum transfer price to Assembly : $7.80 per filter
2. Profit of Parts: Increase $27,200
Profit of Assembly: Increase $56,000
Profit of the whole company: Increase $83,200
The internal transfer should take place as it creates incremental profit for the whole company.
Explanation:
1. The minimum transfer price to Parts should be equal to all variable cost incurred minus variable cost saved once the internal transfer take place: 2.8+ 1.2 - 7,200/20,000 = $3.64.
The maximum transfer price to Assembly should not exceed the price it may get from external provider which is $7.80 per filter.
2. Impact on Profit of Parts: Sales revenue from internal transfer - variable cost incurred + delivery cost saving = 20K x ( 5 - 2.8- 1.2) + 7.2K = $27,200 .
Impact on profit of Assembly: Difference of cost paid to 20K of filters = (7.8-5) x 20K = $56,000 .
Impact on profit of the whole company: Saving of external purchase + saving of delivery cost - variable cost incurred in producing of 20K filters = 20K x 7.8 + 7.2K - 20K x (2.8+1.2) = $83,200 .
As the internal transfer makes money for the whole company, it should take place.
