Materials Used by Best Bread Company in Producing Division A's

question 63

Short Answer

Materials used by Best Bread Company in producing Division A's product are currently purchased from outside suppliers at a cost of $30 per unit. However, the same materials are available from Division B. Division B has unused capacity and can produce the materials needed by Division A at a variable cost of $20 per unit.
(a) If a transfer price of $25 per unit is established and 60,000 units of material are transferred, with no reductions in Division B's current sales, how much would Best Bread Company's total income from operations increase?
(b) Assuming transfer price of $25 per unit is established and 60,000 units of material are transferred, with no reductions in Division B's current sales, how much would the income from operations of Division A increase?
(c) Assuming transfer price of $25 per unit is established and 60,000 units of material are transferred, with no reductions in Division B's current sales, how much would the income from operations of Division B increase?
(d) If the negotiated price approach is used, what would be the range of acceptable transfer prices?

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Definitions:

Production Departments

Departments within a company responsible for the manufacturing or production of goods.

Support Departments

Units within an organization that provide essential services but do not directly contribute to the production of goods or services sold.

Support Department Costs

Expenses incurred by departments that do not directly produce goods or services but provide essential support to production departments.

Investment Center

A business unit within an organization that is directly responsible for generating revenue as well as controlling its costs and investments.