Final answer:
The lowest acceptable transfer price for the Electrical Division is the variable cost of $5.11, but considering the division's operating capacity and the regular price of $9.60, a transfer at $7.60 could be questionable. The financial advantage for the company per brake unit would be a profit of $1.03. The transfer price range is between the variable cost and the full cost plus opportunity cost.
Step-by-step explanation:
Understanding Transfer Pricing and Divisional ROI
The lowest acceptable transfer price for the Electrical Division, operating at capacity, should be the variable cost of producing the X52 electrical fitting, which is $5.11. Anything above this will contribute to covering fixed costs and profit. However, the regular selling price is $9.60, which includes a contribution to fixed costs and profit.
As the manager of the Electrical Division, I would consider supplying the X52 fitting to the Brake Division for $7.60 if the incremental costs of producing more fittings were covered and provided it would not cannibalize sales at the regular price. Any price above the variable cost contributes to covering fixed costs and could be acceptable if it does not affect regular business. However, since the division is operating at capacity, this would involve forgoing sales at $9.60.
For the financial advantage computation, if the Brake Division can sell the brake units for $57, the total cost per brake unit is $55.97 with the discounted fitting price. Therefore, the company makes a profit of $1.03 per brake unit through internal transfer. However, this ignores the opportunity cost of not selling the fittings to regular customers at a higher price.
The transfer price range should be between the variable cost of production ($5.11) and the full cost plus an opportunity cost margin. Essential for calculating this range is an understanding of the company's overall strategic goals and the impact on divisional ROI.