Question

Use the information for Home Office above with the following 2 changes:

1. The Computer Desk Division is able to sell at full capacity (15,000 units) for $400 per desk.
2. If there is a transfer between division, the Computer Desk division will save $50 per unit in Variable Marketing and Shipping costs.
Answer the following questions. Show your work and clearly label your answers.
a. What is the appropriate Transfer Price range?
b. If a transfer is made for $360 per desk, how much better or worse off is the firm?

Answer 1

An appropriate transfer price range would be the marginal cost minus variable marketing and shipping savings to the market price of $400 per desk. If the transfer is made at $360 per desk, the firm's financial gain or loss would be determined by comparing profits from internal transfer sales against full capacity market sales.

Step-by-step explanation:

The appropriate transfer price range is between the variable cost and the market price per desk. The variable cost is saved on variable marketing and shipping costs when an intra-company transfer occurs, which is $50 in this scenario. Therefore, the minimum transfer price would be the marginal cost minus these savings. On the other hand, the maximum transfer price is the market price, which is $400 as stated.

If a transfer is made at $360 per desk, then we have to determine how much the company gains or loses compared to selling at full capacity in the open market at $400 per desk. This can be found by calculating the difference in profit when desks are sold internally at $360 versus externally at $400.