Question

Alex Ltd. produces kitchen tools, and operates several divisions as profit centers. Division M produces a product that it sells to other companies for $16 per unit. It is currently operating at its full capacity of 45,000 units per year. Variable manufacturing cost is $9 per unit, and variable marketing cost is $3 per unit. The company wishes to create a new division, Division N, to produce an innovative new tool that requires the use of Division M's product (or one very similar). Division N will produce 30,000 units. Currently, Division N can purchase a product equivalent to Division M's from Company X for $15 per unit. However, Alex Ltd. is considering transferring the necessary product from Division M. Required: 1) Assume the transfer price is $12 per unit. How would this affect the purchasing costs of Division N

Answer 1

Division N's purchase costs will decrease by $90,000 per year

Step-by-step explanation:

Division N's purchase cost form outside vendor = total units purchased per year x unit price = 30,000 units x $15 = $450,000

if Division N obtains the product form division M with a transfer price of $12 per unit, their costs will decrease by = total units x (vendor price - transfer price) = 30,000 units x ($15 - $12) = $90,000 per year