Division a of Spangler Company Expects the Following Results Division B Has the Opportunity to Buy the 5,000 Units

question 109

Essay

Division A of Spangler Company expects the following results:
$\begin{array}{lcc}&\text { To Division B} &&\text {To Outsiders }\\ \text {Sales}(5,000 \times \$ 60)&\$300,000\\(\$ 25,000 \times \$ 72) & & \$ & 1,500,000\\\text { Variable costs at } \$ 36 &\underline{ 180,000} &&\underline{ 900,000 }\\ \text { Contribution margin } & \$ 120,000& \$ & 900,000 \\ \begin{array}{l}\text { Fixed costs, all common, allocated on the basis of} \\\text { relative units }\end{array} &\underline{ 60,000} & & \underline{300,000} \\ \text { profit } & \$60,000 & \$ & 600,000 \\\end{array}$
Division B has the opportunity to buy the 5,000 units it needs from an outside supplier at $45 each. Assume that Division A cannot increase sales to outsiders.
Required:
(a) What would be the optimal transfer price?
(b) Assume that Spangler allows the divisional managers to negotiate transfer prices. What would the maximum transfer price be?
(c) Assume that Spangler allows the divisional managers to negotiate transfer prices. What would the minimum transfer price be?

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Definitions:

Compensatory

Pertaining to or intended to provide compensation or reparation for loss, damage, or injury.

Punitive

Intended as punishment, often referring to measures or sanctions designed to penalize undesirable behavior.

Monetary Damages

Financial compensation awarded to a party in a lawsuit for losses or injuries suffered.

Grievance Procedures

Formal processes followed by organizations to address and resolve complaints or disputes raised by employees.