Division N Has Asked Division M of the Same Company

question 10

Essay

Division N has asked Division M of the same company to supply it with 10,000 units of part P782 this year to use in one of its products.Division N has received a bid from an outside supplier for the parts at a price of $25.00 per unit.Division M has the capacity to produce 50,000 units of part P782 per year.Division M expects to sell 46,000 units of part P782 to outside customers this year at a price of $26.00 per unit.To fill the order from Division N,Division M would have to cut back its sales to outside customers.Division M produces part P782 at a variable cost of $17.00 per unit.The cost of packing and shipping the parts for outside customers is $1.00 per unit.These packing and shipping costs would not have to be incurred on sales of the parts to Division N.
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 parts this year from Division N to Division M?
b.Is it in the best interests of the overall company for this transfer to take place? Explain.

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Definitions:

Forecasted Market Return

An estimation of the future returns that will be generated by the market over a specific period.

T-Bill Rate

The yield or interest rate paid to investors in U.S. Treasury bills, often seen as a benchmark for short-term interest rates.

Adjusted Beta

A measurement that accounts for potential changes in the volatility or risk of a stock's returns, used to better predict future performance by adjusting historical beta values.

Single Index Model

A simplified methodology to estimate the returns of a security or portfolio using the performance of a single market index to explain the returns.