The Produce and Can Divisions Are Part of the Same

question 56

Essay

The Produce and Can Divisions are part of the same company. Currently the Can Division buys a part from Produce for $24. The Produce Division wants to increase the price of the part it sells to Can by $6 to $30. The manager of Can has stated that it cannot afford to go that high, as it will decrease the division's profit to near zero. Can Division can buy the part from an outside supplier for $28. The cost data for the Produce Division is as follows: Required:
a. If Produce ceases to produce the parts for Can, it will be able to avoid one-third of the fixed manufacturing overhead. The Produce Division has excess capacity but no alternative uses for its facilities. From the standpoint of the company as a whole, should Can continue to buy from Produce or start to buy from the outside supplier?
b. What should the transfer price for the part be?

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Definitions:

Relative Comparisons

The act of evaluating something in relation to another similar item.

Availability Heuristic

A cognitive shortcut that relies on the immediate examples that come to a person’s mind when evaluating a specific topic, concept, method or decision.

Representative Heuristic

A mental shortcut that involves making a probability judgement by comparing an object or event to a prototype of the object or event.

Additive Strategy

An approach where elements are added together to solve problems or make decisions, often seen in mathematics or decision-making processes.