Task: The Assembly Division of American car Company has offered to purchase 90,000 batteries from the electrical division for $100 per unit. At a normal volume of 250,000 batteries per year, production costs per battery are as follows:
Direct materials $40
Direct labor 24
Variable factory overhead 12
Fixed factory overhead 50
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Total $126
The Electrical division has been selling 250,000 batteries per year to outside buyers at $136 each; capacity is 350,000 batteries per year.The Assembly Division has been buying batteries from outside sources for $130 each.
Required to do:
Question 1-If the transfer price is set at $100/batteries,Would this be in the best interests of the corporation?
Explain why and give dollar amounts?
Question 2-Now assume that the Electrical Division has just signed a new deal to sell 50,000 batteries/year to Costco for $126 each . As part of this agreement,the Electerical Division will have to pay a $2 million fine if it delivers anything less than 50,000 batteries/year to costco.
The Assembly Division wants to buy 90,000 (all or nothing)batteries from the Electrical Division. If the Assembly Division manager and the Electrical Division manager are allowed to negotiate a transfer price,
What is the min. and max. transfer price?