Taurus Ltd has is a company made up of two divisions, the Valve Division and the Pump division. The Valve Division manufactures and sells a standard valve and 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 Pump Division 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.
Required:
a) Assume that the Valve Division has ample idle capacity to handle all the Pump Division’s needs. With justification, determine the transfer price range between the two divisions? [5]
b) Assume that the Valve Division is selling all the valves 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? [5]
c) Assume again that the Valve Division is selling all the valves that it can produce to outside customers on the intermediate market. Also assume that NS3 in variable expenses can be avoided on intra-company sales, due to reduced selling costs. What should be the transfer price between the two divisions? [5]
d) Assume that Taurus Ltd now estimates that the maximum demand for the standard valve is 1 000 units at price zero. The demand will be reduced by 10 units for an increase of N$1 in the selling price. The company has determined that the profit is maximised at the sale of 750 units. Determine the price at which the product should be sold to maximise profit.
