Question

Benson Corporation manufactures car stereos. It is a division of Berna Motors, which manufactures vehicles. Benson sells car stereos to Berna, as well as to other vehicle manufacturers and retail stores. The following information is available for Benson's standard unit: variable cost per unit $37, fixed cost per unit $23, and selling price to outside customer $86. Berna currently purchases a standard unit from an outside supplier for $80. Because of quality concerns and to ensure a reliable supply, the top management of Berna has ordered Benson to provide 200,000 units per year at a transfer price of $35 per unit. Benson is already operating at full capacity. Benson can avoid $3 per unit of variable selling costs by selling the unit internally.
1. What is the minimum transfer price that Benson should accept? ,
2. What is the potential loss to the corporation as a whole resulting from this forced transfer?

Answer 1

Answer:

Potential loss to the whole corporation = $(60,000)

Explanation:

The Benson  Division is operating at full capacity, hence it has no excess capacity .

This implies that it can not produce enough to meet both demand of  internal and external buyers.

Hence, Benson Division  cannot accommodate the demands of the Berna Division at a price lower than the external price, because it will result to a loss in contribution.

To maximize and optimize the group's profit in this scenario, the minimum transfer should be:

Minimum transfer price = External selling price - savings in selling cost resulting from in internal transfer

= $86-3= 83

Minimum transfer price = $83.

Effect on Group's profit

Any unit transferred at a priced lower than $83 would result in a unit loss to the Benson Division equal to $83 minus the transfer  price.

Any unit transferred to Berna at a price lower that its current purchase cost would save the division an amount equal to the current purchase cost  minus the forced transfer price.

The potential loss to the organization as a whole would be computed as the net effect of the following:

Lost contribution by Benson : The difference between the Minimum transfer price and the transfer imposed by the group company multiplied by the quantity transferred.

Savings made by the Berna Division : The difference between the forced transfer price and current purchase of Berna.

We can summarize the effect of the forced transfer price on the whole corporation as follows:

Lost contribution per unit = 83 - 35= 48 .

Savings made per unit = 80 - 35 = 45

                                                                                       $

Total lost contribution by Benson

(48 × 200,000)                                                         (960,000)            

Savings made by Berna as result of the transfer

(45 × 200,000)                                                          900,000

Potential loss to the group                                       (60,000)

Potential loss to the whole corporation = $(60,000)