Problem 1:Division A offers its product to outside markets for $60. It incurs variable costs of $22 per unit and fixed costs of $75,000 per month based on monthly production of 5,000 units. Division B needs 2,000 units of the product that Western produces, but it currently buys them from an outside supplier for $63 per unit. Division A's manager is willing to sell to Eastern for $60 per unit, but also wants a shipping fee of $4 per unit.
Question:
- What are the maximum and minimum transfer prices here?
- If Division A has enough excess capacity to cover Division B's needs, what price should be used? How would this affect the profits of Division A? How would this affect the company as a whole?
- Would your answers to (b) change if Division A is currently selling 4,000 units?
Problem 2:A camera manufacture,currently purchases lenses from an outside company at a price of $200 per unit. While the quality of the lenses has always been very high,company's management believes it might be possible to produce a superior lens internally at a cost lower than $200. The accounting department has provided the following estimate of a per-unit manufacturing cost for the lens:
| Direct materials |
$88 |
| Direct labor |
$81 |
| Variable overhead |
$35 |
| Fixed overhead allocation |
$90 |
| Total per unit |
$294 |
The company's controller believes that the estimate may be incorrect because the corporation has excess manufacturing space and will not incur additional fixed overhead if they produce the lenses.
Question: Should the company make the lenses or continue to buy them? Show supporting calculations, including savings/loss if they need 15,000 lenses.