Division N Has Asked Division M of the Same Company

question 85

Essay

Division N has asked Division M of the same company to supply it with 10,000 units of part P782 this year to use in one of its products. Division N has received a bid from an outside supplier for the parts at a price of $25.00 per unit. Division M has the capacity to produce 50,000 units of part P782 per year. Division M expects to sell 46,000 units of part P782 to outside customers this year at a price of $26.00 per unit. To fill the order from Division N, Division M would have to cut back its sales to outside customers. Division M produces part P782 at a variable cost of $17.00 per unit. The cost of packing and shipping the parts for outside customers is $1.00 per unit. These packing and shipping costs would not have to be incurred on sales of the parts to Division N.
Required:
(a) What is the range of transfer prices within which both divisions' profits would increase as a result of agreeing to the transfer of 10,000 parts this year from Division M to Division N?
(b) Is it in the best interest of the overall company for this transfer to take place? Explain.

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Definitions:

Test-retest Reliability

Test-retest reliability is a measure of consistency where the same test is administered to the same group of people at different times to assess the reliability over time.

Construct Validity

The extent to which a test or instrument accurately measures the theoretical, non-observable constructs it is designed to assess.

Predictive Validity

The degree to which a measurement or test score forecasts future results on a connected outcome.

Concurrent Validity

A measure of how well a particular test predicts outcomes based on comparison with other measures that are administered at the same time.