One of the Divisions in Milsap Manufacturing Company Is the Camera

question 5

Essay

One of the divisions in Milsap Manufacturing Company is the Camera Division.The Camera Division is developing a new product that would require a lens not commercially available.The Camera Division believes it can sell 40,000 units of the new product each year at a selling price of $120.Variable costs for the new product would be $60,not including the filter,and there will be $160,000 of incremental fixed costs associated with the product.The Camera Division does not have the expertise to make the lenses.Milsap Manufacturing Company has a Lens Division that could make the lenses and has sufficient idle capacity.It estimates the variable cost per unit would be $16 and incremental fixed costs would be $120,000 each year.
Required:
1)There are different bases that can be used in setting transfer prices,including market prices.What basis should be used in this situation?
2)What is the maximum transfer price Camera Division should be willing to pay? Note that,without the lenses,the Camera Division cannot make and sell its new product.
3)What is the minimum transfer price that Lens Division should be willing to accept?
4)Should the transfer be made? If not,why not? If so,what transfer price (or range of transfer prices)would you recommend?

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Definitions:

Total Revenue

Total Revenue is the full amount of money received by a company for its goods or services, before any expenses are subtracted.

Equilibrium Price

The price at which the quantity of goods supplied is equal to the quantity of goods demanded in a market.

Quantity Demanded

The total amount of goods or services that consumers are willing and able to purchase at a given price level.

Demand

The amount of a particular good or service that consumers are willing and able to purchase at various prices during a certain period of time.