Pomme Corporation Has a Motor Division That Does Work for Other

question 96

Essay

Pomme Corporation has a Motor Division that does work for other divisions in the company as well as for outside customers. The company's Equipment Division has asked the Motor Division to provide it with 2,000 special motors each year. The special motors would require $17.00 per unit in variable production costs. The Equipment Division has a bid from an outside supplier for the special motors at $28.00 per unit. In order to have time and space to produce the special motor, the Motor Division would have to cut back production of another motor - the J789 that it is currently producing. The J789 sells for $34.00 per unit and requires $22.00 per unit in variable production costs. Packaging and shipping costs of the J789 are $4.00 per unit. Packaging and shipping costs for the new special motor would be only $0.50 per unit. The Motor Division is currently producing and selling 10,000 units of the J789 each year. Production and sales of the J789 would drop by 10% if the new special motor is produced for the Equipment Division.
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 2,000 special motors per year from the Motor Division to the Equipment Division?
b. Is it in the best interest of Pomme Corporation for this transfer to take place? Explain.

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Definitions:

Future Market Value

An estimation of what an asset or investment will be worth in the future, based on expected growth rates or market trends.

Difficult To Predict

A term indicating uncertainty in forecasting future events or outcomes due to complex variables and lack of clear precedent.

Right To Cancel

The legal entitlement allowing a consumer to annul a contract or agreement within a specified timeframe, often without penalty.

Operating Lease

A lease agreement allowing one to use an asset but does not convey rights of ownership of the asset.