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Homework answers / question archive / One of the divisions of Phoenix Corporation is the Motor Division
One of the divisions of Phoenix Corporation is the Motor Division. This division currently is designing a new, energy-efficient motor that would require a specialized filter. An outside company has offered to provide the 40,000 filters needed each year at $12.50 each. Phoenix is considering setting up a separate division, the Filter Division, to make the filters. The variable cost per unit would be $4, and total fixed costs incurred by the Filter Division would be $240,000. Required: 1) If the Filter Division is established, Phoenix would need to determine the basis (market-based or other basis) to use in setting the transfer price. What basis would you recommend in this case? 2) What is the maximum transfer price that the Motor Division should be willing to pay for the filters? 3) What is the minimum transfer price that Filter Division should be willing to accept for the filters? 4) Should the transfer be made? What effect would the transfer have on the profits of Phoenix Corporation?
| 1 | If Filter Division is established then Phoenix should use the market-based basis for setting the transfer price | ||
| 2 | Maximum transfer price that Motor Division will be willing to pay shall be equal to the Market price which is $12.50 per filter | ||
| 3 | The Minimum transfer price that the Filter division shall be willing to accept will be equal to the variable cost per filter which is $4.00 per filter | ||
| 4 | Yes, the transfer price should be accepted as this will result in incremental profit of $2.50 per filter($12.50-$4-$6) | ||
| $6 per filter is the Fixed cost per filter which will be calculated as $240,000/40,000 | |||
