Fistman Corporation Has a Parts Division That Does Work for Other

Question

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The Answer is (Note: Due 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. )
a.From the perspective of the Parts Division,profits would increase as a result of the transfer if and only if:
Transfer price > Variable cost + Opportunity cost
The opportunity cost is the contribution margin on the lost sales,divided by the number of units transferred:
Opportunity cost = [($32.00-$19.00-$3.00)x8,000*]/10,000 = $8.00
* 20%x40,000 = 8,000
Therefore,Transfer price > ($15.00+$1.00)+$8.00 = $24.00.
From the viewpoint of the Machine Products Division,the transfer price must be less than the cost of buying the units from the outside supplier.Therefore,Transfer price < $29.00.
Combining the two requirements,we get the following range of transfer prices: $24.00 < Transfer price < $29.00.
b.Yes,the transfer should take place.From the viewpoint of the entire company,the cost of transferring the units within the company is $24.00,but the cost of purchasing the special parts from the outside supplier is $29.00.Therefore,the company's profits increase on average by $5.00 for each of the special parts that is transferred within the company,even though this would cut into production and sales of another product.

Fistman Corporation Has a Parts Division That Does Work for Other

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