Collyer Ltd has a Valve Division that manufactures and sells a standard valve. The following details are given regarding the standard valve:
Capacity in units 100 000
Selling price to outside customers on the intermediate market N$30
Variable costs per unit N$16
Fixed costs per unit (based on capacity) N$ 9
The company has a Pump Division that could use this valve in the manufacture of one of its pumps. The Pump Division is currently purchasing 10 000 valves per year from an overseas supplier at a cost of N$29 per valve
a) Assume that the Valve Division has ample idle capacity to handle all of the Pump Division’s needs. With justification determine the transfer price range between the two divisions?
b) Assume that the Valve Division is selling all that it can produce to outside customers on the intermediate market. What should be the transfer price between the two divisions? At this price, will any transfers be made?
c).Assume again that the Valve Division is selling all that it can produce to outside customers on the intermediate market. Also assume that N$3 in variable expenses can be avoided on intracompany sales, due to reduced selling costs. What should be the transfer price between the two divisions?
d).Refer to the original data. Assume that the Pump Division needs 20 000 special valves per year that are to be supplied by the Valve division. The valve division’s variable costs to manufacture and ship the special valve would be N$20 per unit. To produce these special valves, the Valve Division would have to give up one-half of its production of the regular valves (that is, cut its production of the regular valves from 100 000 units per year to 50000 units per year). You can assume that the Valve division is selling all of the regular valves that it can produce to outside customers on the intermediate market.
If the Valve Division decides to produce the special valves for the Pump Division, what transfer price should it charge per valve?
Leave an answer