FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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XYZ Co has two divisions, X and Y. Division X makes a component for washing machines which it can only sell to Division Y. It has no other outlet for sales.
Current information relating to Division X is as follows:
Marginal cost per unit $1000
Transfer price of the component $1650
Total production and sales of the component each year 2,200 units
Specific fixed costs of Division X per year $100,000
ABC has offered to sell the component to Division Y for $1400 per unit. If Division Y accepts this offer, Division X will be closed.
1. What is the minimum and maximum transfer price?
2. What will happen to XYZ’s profits if Division Y accepts the supplier’s offer and Division X is closed?
3. Assuming if Division Y buys from the outside supplier the facilities currently used to produce the component can be used to produce another product which will result in a contribution margin of $75,000. Division X cannot manufacture the component and produce the other product at the same time. What is the minimum transfer price?
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