Question

Ganus Products, Inc., has a Relay Division that manufactures and sells a number of products, including a standard relay that could be used by another division in the company, the Electronics Division, in one of its products. Data concerning that relay appear below: Capacity in units 52,500 Selling price to outside customers $ 41 Variable cost per unit $ 12 Fixed cost per unit (based on capacity) $ 24 The Electronics Division is currently purchasing 7,350 of these relays per year from an overseas supplier at a cost of $38 per relay. Assume that the Relay Division is selling all of the relays it can produce to outside customers. Also assume that $4 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. Does there exist a transfer price that would make both the Relay and Electronics Division financially better off than if the Electronics Division were to continue buying its relays from the outside supplier

Answer 1

Answer and Explanation:

Given that

Units capacity = 52,500

Selling price to outside customers = $41

Variable cost per unit = $12

Fixed cost per unit  = $24

Current purchased = 7,350 relay per year

Supplier cost per relay = $38

Avoidable variable expense = $4

Based on this, the minimum transfer price should be existed. Selling division would accept less than the maximum transfer price the buying division will approve. If the transfers were to occur both divisions would be better financially off.

As the minimum accpeted price is

= Selling price per unit - avoidable variable cost

= $41 - $4

= $37 per unit

And the supplier cost is $38 per unit

So it is less than the maximum transfer price i.e $38 per unit