Rapid Industries Has Multiple Divisions

question 74

Essay

Rapid Industries has multiple divisions.One division,Iron Products,makes a component that another division,Austin,is currently purchasing on the open market.Iron Products currently has a capacity to produce 500,000 components at a variable cost of $7.50 and a full cost of $10.00.Iron Products has outside sales of 460,000 components at a price of $12.50 per unit.Austin currently purchases 50,000 units from an outside supplier at a price of $12.00 per unit.Assume that Austin desires to use a single supplier for its component.
a.What will be the effect on Rapid Industries' operating profit if the transfer is made internally? Assume the 50,000 units Austin needs are either purchased 100% internally or 100% externally.
b.What is the minimum transfer price?
c.What is the maximum transfer price?

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Definitions:

Duty of Care

A responsibility mandated by law, compelling a person to maintain a level of carefulness in behaviors that might predictably injure others.

Invitee

A person who is invited onto someone's property for the owner's benefit, often related to business or commerce, and is owed a high duty of care.

Licensee

A person or entity that is granted permission to enter or use another's property for a specific purpose without transferring property ownership.

Trespasser

An individual who enters or uses another's property without permission, potentially facing legal action for unauthorized intrusion.