Division X Has Asked Division K of the Easton Company

question 58

Essay

Division X has asked Division K of the Easton Company to supply it with 5,000 units of part L433 this year to use in one of its products.Division X has received a bid from an outside supplier for the parts at a price of $26.00 per unit.Division K has the capacity to produce 30,000 units of part L433 per year.Division K expects to sell 26,000 units of part L433 to outside customers this year at a price of $30.00 per unit.To fill the order from Division X,Division K would have to cut back its sales to outside customers.Division K produces part L433 at a variable cost of $21.00 per unit.The cost of packing and shipping the parts for outside customers is $2.00 per unit.These packing and shipping costs would not have to be incurred on sales of the parts to Division X.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 5,000 parts this year from Division X to Division K?
b.Is it in the best interests of the overall Easton Company for this transfer to take place? Explain.

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Definitions:

Exaggerated Emotions

Intensified feelings that are often disproportionate to the situation, sometimes due to stress, personality traits, or psychological conditions.

Repression

A psychological defense mechanism where distressing thoughts and memories are unconsciously blocked from conscious awareness.

Displacement

In psychology, a defense mechanism involving the redirection of an impulse from a real target to a safer or substitute one.

Repressed Emotions

Emotions that are unconsciously hidden or suppressed due to being deemed unacceptable or threatening by the individual.