Problem:
Nexta's division A produces a product that can be sold for $200 or transferred to Division B as a component for its product. Division B can buy the part from another suppler at $180. In the current period, Division B purchased 1,000 units from Division B. Data on a per-unit basis follows:
Division A Division B
Selling Price $200 $600
Variable Cost $100 $200
Allocated fixed costs 90 159
The variable cost in Division B does not include the cost of the component provided by Division A or the outside supplier.
Required.
a) What is the minimum transfer price if Division A is operating at capacity?
What is the minimum transfer price if Division A is operating below capacity?
b) Calculate the effect on the company's contribution margin if Division A has excess capacity and Division B buys 1,000 units from the outside supplier.
c) What is the contribution margin for the company for 1,000 units if Division A is required to sell to Division B when there is no excess capacity? What is the contribution margin for the company if Division A is at capacity and sells 1,000 units to the external market and Division B purchases 1,000 unit from an outside supplier?
d) I t is more profitable for the company to require Division A to transfer units to Division B. Explain.
e) If there are no outside suppliers and Division A is at capacity, is the company better off to have Division A sell externally or internally? Show your calculation.