Chesley Products, Incorporated, Has a Connector Division That Manufactures and Sells

question 154

Essay

Chesley Products, Incorporated, has a Connector Division that manufactures and sells a number of products, including a standard connector. Data concerning that connector appear below:
The company has a Transmission Division that could use this connector in one of its products. The Transmission Division is currently purchasing 8,000 of these connectors per year from an overseas supplier at a cost of $82 per connector.
Required:
a. Assume that the Connector Division has enough idle capacity to handle all of the Transmission Division's needs. What is the acceptable range, if any, for the transfer price between the two divisions?
b. Assume that the Connector Division is selling all of the connectors it can produce to outside customers. What is the acceptable range, if any, for the transfer price between the two divisions?
c. Assume again that the Connector Division is selling all of the connectors it can produce to outside customers. Also assume that $3 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:

Discount Rate

The rate of interest that is applied to find out the present value of cash flows predicted in the future, within the framework of discounted cash flow analysis.

Present Value

The monetary valuation presently of a future sum of money or ongoing cash flows, considering a predetermined rate of return.

Interest Rate

The amount charged by a lender to a borrower for the use of assets, expressed as a percentage of the principal, typically on an annual basis.

Discount Rate

Within DCF analysis, it's the rate employed to compute the present economic value of expected future cash inflows.