Shipping Industries Is a Decentralized Company That Evaluates Its Divisions

question 43

Essay

Shipping Industries is a decentralized company that evaluates its divisions based on ROI.The North Division has the capacity to produce 2,000 units of a component.The North Division's variable costs are $85 per unit;fixed costs are $70 per unit.The South Division can use the product as a component in one of its products.The South Division would incur $65 of variable costs to convert the component into its own product which sells for $310.Required:
(consider each question independent of each other):
a.Assume the North Division can sell all that it produces for $185 each.The South Division needs 100 units.What is the appropriate transfer price?
b.Assume the North Division can sell 1,800 units at $265.Any excess capacity will be unused unless the units are purchased by the South Division (which can use up to 100 units).What are the minimum and maximum transfer prices?

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