Figure 12-8 Bostonian Inc.has a Number of Divisions,including Delta Division and ListenNow

question 155

Essay

Figure 12-8
Bostonian Inc.has a number of divisions,including Delta Division and ListenNow Division.The ListenNow Division owns and operates a line of MP3 players.Each year the ListenNow Division purchases component AZ in order to manufacture the MP3 players.Currently it purchases this component from an outside supplier for $6.50 per component.The manager of the Delta Division has approached the manager of the ListenNow Division about selling component AZ to the ListenNow Division.The full product cost of component AZ is $3.10.The Delta Division can sell all of the components AZ it makes to outside companies for $6.50.The ListenNow Division needs 18,000 component AZs per year; the Delta Division can make up to 60,000 components per year.
Refer to Figure 12-8.Although the Delta Division has been operating at capacity (60,000 components per year),it expects to produce and sell only 45,000 components for $6.50 each next year.The Delta Division incurs variable costs of $1.50 per component.The company policy is that all transfer prices are negotiated by the divisions involved.
Required:
A.What is the maximum transfer price? Which division sets it?
B.What is the minimum transfer price? Which division sets it?
C.Suppose that the two divisions agree on a transfer price of $5.75.What is the change in operating income for the Delta Division? For the ListenNow Division? For Bostonian Inc.as a whole?

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