ED Electronics operates as a decentralized company. The bit division manufactures an electronic device and purchases a component, part X22, from the part division of the same company. The division managers have full authority on decisions involving transactions with internal or external customers and suppliers. Currently, the part division is operating at full capacity and the bit division is operating below its capacity of 5,000 units. Part X22 can be sold externally for $75. The costs of producing the electronic device, excluding the cost of part X22, are as follows:
Direct materials …………………….$ 120
Direct labour ………………………….30
Variable overhead ……………………125
Fixed overhead ………………………100
Total ………………………………. $ 375
The manager of the bit division has received an offer from a national distributor willing to buy 500 electronic devices at a price of $425 per unit.
REQUIRED
A. Indicate the minimum transfer price that the manager of the part division would agree to. Justify your answer.
B. Indicate the maximum transfer price that the manager of the bit division would be willing to pay for part X22. Justify your answer.
C. Assume the full cost of part X22 is $50. Explain whether the firm as a whole would benefit if part X22 is transferred from the part division to the bit division at full cost. Justify your answer.
D. Explain whether your answer to Part C would be different if the part division is not operating at full capacity?
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