Question:
In each of the following cases, the Speaker Division can sell all of its production of audio speakers to outside customers or it can sell some of it to the Sound System Division and the remainder to outside customers. Speaker Division's speaker production capacity is 200,000 units annually. The data related to each independent case are as follows:
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SPEAKER DIVISION
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Production costs per unit:
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Case 1
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Case 2
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|
Direct material
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$30
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$20
|
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Direct labor
|
10
|
8
|
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Variable overhead
|
3
|
2
|
|
Fixed overhead (based on capacity)
|
1
|
1
|
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Other variable selling and delivery costs per unit*
|
6
|
4
|
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Selling price to outside customers
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75
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60
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SOUND SYSTEM DIVISION
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Number of speakers needed annually
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40,000
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40,000
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Current unit price being paid to outside supplier
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$65
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$52
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a. For each case, determine the upper and lower limits for a transfer price for speakers.
b. For each case, determine a transfer price for the Speaker Division that will provide a $10 contribution margin per unit.
c. Using the information developed for part (b), determine a dual transfer price for Case 1 assuming that Sound System will be able to acquire these peakers from the Speaker Division at $10 below Sound System's purchase price from outside suppliers.