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Homework answers / question archive / The Component Division produces a part that is used by the Assembly Division
The Component Division produces a part that is used by the Assembly Division. The costs of manufacturing the part are as follows: Direct materials @ RM12 per unit Direct labour RM2 per hour Variable overhead @ RM3 per unit Fixed overhead (based on a practical volume of 200,000 parts) @ RM5 Other costs incurred by the Components Division are as follows: RM5 Fixed selling & administration (per unit) Variable selling (per unit) RM3 The part usually sells for between RM29 and RM32 in the external market Currently, the Component Division is selling it to the external customers for RM30. The division is capable to produce 200,000 units of the part per year. However, due to a weak economy, only 150,000 parts are expected to be sold in the coming year. The variable selling expenses are avoidable if the part is sold internally
The Assembly Division has been buying the same part from an external supplier for RM29. It expects to use 50,000 units of the part during the coming year. The manager of the Assembly Division has offered to buy 50,000 units from the Component Division for RM20 per unit. Required: (Show all calculations) (a) Determine the minimum transfer price that the Component Division should accept. Explain the rationale for your answer. (6 marks) (b) Determine the maximum transfer price that the manager of the Assembly Division would pay. Explain the rationale for your answer. (6 marks) (c) Recommend to the manager of the Component Division on whether he should sell the 50,000 components for RM20 per unit to the Assembly Division. Explain to the manager of the Component Division on what he could do. Justify your answer.
Answer: a) minimum transfer price component divison should accept:
As component divison can only sold 150,000 units in external market, so 50,000 units are spare capacity, Assembly divison required 50,000 units.
So the minimum transfer price would be variable cost of component divison, variable selling expense can also be avoided if sold to assembly divison.
So minimum transfer price would be: RM 12 + RM 2 + RM3 = RM 17.
b) Maximum transfer price assembly divison would pay is: upto RM29, which it can purchased from supplier.
c) Yes, the divison of component divison could sell 50,000 components at RM 20.
As variable cost for transfer is RM 17 as shown in part a for component divison, because RM 3 of variable selling expense can be avoided while transfer internally.
As 50,000 units are spare capacity for component divison, so at only variable cost it can be transferred.
