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:

Sold

A term indicating that an item, asset, or property has been transferred from one party to another in exchange for money or other compensation.

Defaults

Situations where a party fails to fulfill their obligations as specified in a contract or agreement.

Construction Lien

A claim made against a property by a contractor or subcontractor who has not been paid for work performed or materials supplied.

Building Contract

A legally binding agreement between a property owner and a contractor for the construction or renovation of a building, detailing the work to be done, materials, costs, and timeframes.