Shipping Industries Is a Decentralized Company That Evaluates Its Divisions

question 55

Essay

Shipping Industries is a decentralized company that evaluates its divisions based on ROI. The North Division has the capacity to produce 2,000 units of a component. The North Division's variable costs are $85 per unit and fixed costs are $70 per unit.
The South Division can use the North Division's product as a component in one of its products. The South Division would incur $65 of variable costs to convert the component into its own product which sells for $310.
Required (consider each question independently):
(a) Assume the North Division can sell all that it produces for $185 each. The South Division needs 100 units. What is the appropriate transfer price?
(b) Assume the North Division can sell 1,800 units at $265. Any excess capacity will be unused unless the units are purchased by the South Division (which can use up to 100 units). What are the minimum and maximum transfer prices?

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