Question

Crede Inc. has two divisions. Division A makes and sells student desks. Division B manufactures and sells reading lamps. Each desk has a reading lamp as one of its components. Division A can purchase reading lamps at a cost of $ 10.15 from an outside vendor. Division A needs 10,600 lamps for the coming year. Division B has the capacity to manufacture 50,700 lamps annually. Sales to outside customers are estimated at 40,100 lamps for the next year. Reading lamps are sold at $ 12.04 each. Variable costs are $ 6.63 per lamp and include $ 1.23 of variable sales costs that are not incurred if lamps are sold internally to Division A. The total amount of fixed costs for Division B is $ 83,800 . Consider the following independent situations. Collapse question part (a) What should be the minimum transfer price accepted by Division B for the 10,600 lamps and the maximum transfer price paid by Division A

Answer 1

$6.63

Step-by-step explanation:

As Division B has spare capacity after fullfillling their outside consumer demand It can provide to Division A at their marginal cost to make a better use of the fixed cost.

In this case, Division B can sale up to 10,600 lamps which is the amount needed for DIvision A.

The sales variable cost are not considered as the division will assume any when selling internally.