Lola Metals has two decentralized divisions, Stamping and Finishing. Finishing always has purchased certain units from Stamping at $36 per unit. Stamping plans to raise the price to $48 per unit, the price it receives from outside customers. As a result, Finishing is considering buying these units from outside suppliers for $36 per unit. Corporate policy allows division managers to choose both customers and suppliers regardless of the transfer price. Stamping’s costs follow: Variable costs per unit $ 34 Annual fixed costs $ 60,000 Annual production of these units sold to Alpha 27,000
Lola Metals has two decentralized divisions, Stamping and Finishing. Finishing always has purchased certain units from Stamping at $36 per unit. Stamping plans to raise the price to $48 per unit, the price it receives from outside customers. As a result, Finishing is considering buying these units from outside suppliers for $36 per unit. Corporate policy allows division managers to choose both customers and suppliers regardless of the transfer price. Stamping’s costs follow:
| Variable costs per unit | $ 34 | |
|---|---|---|
| Annual fixed costs | $ 60,000 | |
| Annual production of these units sold to Alpha | 27,000 | units |
Required:
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If Finishing buys from an outside supplier, the facilities that Stamping uses to produce these units will remain idle. What will be the impact on corporate profits if Lola Metals enforces a transfer price of $48 per unit between Stamping and Finishing
Specifically, what would be Lola Metal's contribution margin? -
Suppose Lola Metals enforces a transfer price of $36 and insists that Stamping sell to Finishing before selling to outside customers. Stamping currently operates at capacity and can easily sell on the outside market the units it sells to Finishing. What cost will Lola Metals incur as a result of this policy?
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