Division X Has Asked Division K of the Easton Company

question 59

Essay

Division X has asked Division K of the Easton Company to supply it with 5,000 units of part L433 this year to use in one of its products. Division X has received a bid from an outside supplier for the parts at a price of $26.00 per unit. Division K has the capacity to produce 30,000 units of part L433 per year. Division K expects to sell 26,000 units of part L433 to outside customers this year at a price of $30.00 per unit. To fill the order from Division X, Division K would have to cut back its sales to outside customers. Division K produces part L433 at a variable cost of $21.00 per unit. The cost of packing and shipping the parts for outside customers is $2.00 per unit. These packing and shipping costs would not have to be incurred on sales of the parts to Division X.
Required:
a. What is the range of transfer prices within which both the divisions' profits would increase as a result of agreeing to the transfer of 5,000 parts this year from Division K to Division X?
b. Is it in the best interest of the Easton Company overall for this transfer to take place? Explain.

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Definitions:

Fixed-Position Layouts

A layout strategy where the product remains stationary, and workers, materials, and equipment are moved to the product site for assembly or construction.

Maximum Time

The longest allowable or estimated time duration within which a particular task or process should be completed.

Computer Software

Programs and other operational information used by a computer to perform specific tasks.

Physical Surroundings

The environment or setting in which a process, event, or activity takes place, often impacting outcomes or experiences.