Prejean Products, Incorporated, Has a Relay Division That Manufactures and Sells

question 255

Essay

Prejean Products, Incorporated, has a Relay Division that manufactures and sells a number of products, including a standard relay. Data concerning that relay appear below:
The company has a Electronics Division that could use this relay in one of its products. The Electronics Division is currently purchasing 9,000 of these relays per year from an overseas supplier at a cost of $74 per relay.
Required:
a. Assume that the Relay Division has enough idle capacity to handle all of the Electronics Division's needs. What is the acceptable range, if any, for the transfer price between the two divisions?
b. Assume that the Relay Division is selling all of the relays it can produce to outside customers. Also assume that $13 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. What is the acceptable range, if any, for the transfer price between the two divisions?

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Definitions:

Balance Sheet

A report that outlines the assets, liabilities, and owners' equity of a business at a certain moment, offering an overview of its financial health.

Office Supplies

Items used in offices for daily operations, like stationery, paper, and other consumables.

Salaries Accrued

Salaries that have been earned by employees but have not yet been paid by the company, representing a liability on the balance sheet.

Accounting Period

A specific time period for which financial information is reported, often a quarter or a year.