Finnish Corporation Has a Supply Division That Does Work for Other

question 107

Essay

Finnish Corporation has a Supply Division that does work for other Divisions in the company as well as for outside customers.The company's Custodial Products Division has asked the Supply Division to provide it with 10,000 special items each year.The special items would require $15.00 per unit in variable production costs.The Custodial Products Division has a bid from an outside supplier for the special items at $29.00 per unit.In order to have time and space to produce the special items,the Supply Division would have to cut back production of another product - the H56 that it presently is producing.The H56 sells for $32.00 per unit,and requires $19.00 per unit in variable production costs.Packaging and shipping costs of the H56 are $3.00 per unit.Packaging and shipping costs for the new special part would be only $1.00 per unit.The Supply Division is now producing and selling 40,000 units of the H56 each year.Production and sales of the H56 would drop by 20% if the new special item is produced for the Custodial Products Division.Required:
a.What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 10,000 special parts per year from the Supply Division to the Custodial Products Division?
b.Is it in the best interests of Finnish Corporation for this transfer to take place? Explain.(Note: Due to limitations in fonts and word processing software,> and < signs must be used in this solution rather than "greater than or equal to" and "less than or equal to" signs. )

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Definitions:

Market Value

The prevailing cost at which an asset or service can be traded or acquired.

Face Value

The nominal or dollar value printed on a financial instrument like a bond or stock certificate.

Premium

An amount paid for an insurance policy or an amount above the nominal value of a security or investment.

Market Rates

The prevailing interest or exchange rates in the financial markets at any given time.