FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Chow’s Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers. The company’s Machine Products Division is currently purchasing 10,000 units of special parts at $29 per unit from an outside supplier every year. The special parts could also be produced by the Parts Division at variable production costs of $15 per unit.
However, in order to have time and space to produce the special part, the Parts Division would have to cut back production of another part, the H56 that it presently is producing. The H56 sells for $32 per unit and requires $19 per unit in variable production costs.
Packaging and shipping costs of the H56 are $3 per unit. Packaging and shipping costs for the special part would be only $1 per unit. The Parts Division is now producing and selling 40,000 units of the H56 each year. Production and sales of the H56 would drop by 20% if the special part is produced for the Machine Products Division.
a. What is the range of transfer prices within which both the Divisions’ profits would increase as a result of agreeing to the transfer of 10,000 special parts per year from the Parts Division to the Machine Products Division?
b. Is it in the best interests of Chow’s Corporation for this transfer to take place? Explain.
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