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The Post Division of Awal Company produces basic posts, which can be sold to outside customers or sold to the Lamp Division of Awal Company
The Post Division of Awal Company produces basic posts, which can be sold to outside customers or sold to the Lamp Division of Awal Company. The following data are available for last year's activities of the Post Division 8 points ? Saved The Post Division: Capacity in units Selling price per post to outside customers Variable costs per post Fixed costs, total 150,000 $0.875 $0.45 $75,000 The Lamp Division Number of Units needed Purchase Price from Outside Suppliers. 12,500 posts $0.75 Required: 1. Suppose that the Post Division sells to outside customers 135,000 units. What is the lowest transfer price that would not reduce the profits of the Post Division? And what is the range of transfer? 2. Suppose that the Post Division sells to outside customers 150,000 units and the cost of packing and shipping the posts for outside customers is $0.05 per unit, these packing and shipping costs would not have to be incurred on sales of the posts to Lamp Division. What is the lowest transfer price that would not reduce the profits of the Post Division? And what is the range of transfer?
Expert Solution
Capacity of post division = 150,000 units
Selling price to outsiders = 0.875
Requirement of lamp division = 12,500 units.
1) when post division sold 135,000 units to outsiders and it's capacity is 150,000. So it can fulfill the requirement of lamp division for 12,500 units.
in the case of idal capacity, the minimum transfer price is the variable cost only.
Minimum transfer price = $0.45.
if lamp division purchase from outside, it will cost $0.75 per unit. post division can not fix transfer price more than 0.75
so range = $0.45 - $0.75
2) when post division can sell 150,000 units to outsiders. In this case post division has no idal capacity and it can charge the transfer price equal to selling price for outsiders minus packing and shipping cost.
minimum transfer price = 0.875 - 0.05
= $0.825.
this price will not impact the profit of post division. But lamp division can by from outside at $0.75
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