Max Ltd Produces Kitchen Tools, and Operates Several Divisions as Investment

question 12

Essay

Max Ltd. produces kitchen tools, and operates several divisions as investment centers. Division M produces a product that it sells to other companies for $16 per unit. It is currently operating at full capacity of 45,000 units per year. Variable manufacturing cost is $9 per unit, and variable marketing cost is $3 per unit. The company wishes to create a new division, Division N, to produce an innovative new tool that requires the use of Division B's product (or one very similar). Division N will produce 30,000 units per year. Currently, Division N can purchase a product equivalent to Division M's from Company X for $15 per unit. However, Max Ltd. is considering transferring the necessary product from Division M.
Required:
1. Assume the transfer price is $12 per unit:
a. How would this price affect the purchasing costs of Division N?
b. How would this price affect the profits of Division M?
c. How would this price affect Max Ltd. as a whole?
2. What if the transfer price were $13 per unit?

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Definitions:

Individualistic Culture

a culture that emphasizes personal goals and rights above those of the collective, with a focus on individual achievement and freedom.

Cafeteria Compensation Plans

Employee benefit plans that allow workers to choose from a variety of pre-tax benefits to create a package that best suits their needs.

Contingent Time Off

Time off from work that is not planned in advance and depends on certain conditions or occurrences, such as emergencies or unexpected events.

Perceived Inequity

A feeling of unfairness experienced when an individual perceives a disparity between their inputs and outputs compared to others in a similar situation.