University of Southern Philippines Foundation

AC 42 | Management Accounting 2
Homework | 11 August 2018

1. Ulrich Company has a Castings Division which does casting work of various types. The company's Machine Products
Division has asked the Castings Division to provide it with 20,000 special castings each year on a continuing
basis. The special casting would require P12 per unit in variable production costs.
In order to have time and space to produce the new casting, the Castings Division would have to cut back production of
another casting - the RB4 which it presently is producing. The RB4 sells for P40 per unit, and requires P18 per
unit in variable production costs. Boxing and shipping costs of the RB4 are P6 per unit. Boxing and shipping costs
for the new special casting would be only P1 per unit, thereby saving the company P5 per unit in cost. The
company is now producing and selling 100,000 units of the RB4 each year. Production and sales of this casting
would drop by 25 percent if the new casting is produced. Some P240,000 in fixed production costs in the Castings
Division are now being covered by the RB4 casting; 25 percent of these costs would have to be covered by the
new casting if it is produced and sold to the Machine Products Division.
Required: What is the lowest acceptable transfer price from the viewpoint of the selling division? Show all computations.

2. Ishtaki Corporation has a Parts Division that does work for other Divisions in the company as well as for outside
customers. The company's Equipment Division has asked the Parts Division to provide it with 20,000 special parts
each year. The special parts would require P16.00 per unit in variable production costs.
The Equipment Division has a bid from an outside supplier for the special parts at P25.00 per unit. In order to have time
and space to produce the special part, the Parts Division would have to cut back production of another part-the
PW27 that it presently is producing. The PW27 sells for P38.00 per unit, and requires P29.00 per unit in variable
production costs. Packaging and shipping costs of the PW27 are P2.00 per unit. Packaging and shipping costs for
the new special part would be only P0.50 per unit. The Parts Division is now producing and selling 40,000 units of
the PW27 each year. Production and sales of the PW27 would drop by 40% if the new special part is produced
for the Equipment Division.
Required:
a. What is the range of transfer prices within which both the Divisions' profits would increase as a result of
agreeing to the transfer of 20,000 special parts per year from the Parts Division to the Equipment Division?
b. Is it in the best interests of Ishtaki Corporation for this transfer to take place? Explain.

3. Division G has asked Division F of the same company to supply it with 5,000 units of part WD26 this year to use in one
of its products. Division G has received a bid from an outside supplier for the parts at a price of P19.00 per unit.
Division F has the capacity to produce 25,000 units of part WD26 per year. Division F expects to sell 21,000 units
of part WD26 to outside customers this year at a price of P18.00 per unit. To fill the order from Division G,
Division F would have to cut back its sales to outside customers. Division F produces part WD26 at a variable cost
of P12.00 per unit. The cost of packing and shipping the parts for outside customers is P2.00 per unit. These
packing and shipping costs would not have to be incurred on sales of the parts to Division G.
Required:
a. What is the range of transfer prices within which both the Divisions' profits would increase as a result of
agreeing to the transfer of 5,000 parts this year from Division G to Division F?
b. Is it in the best interests of the overall company for this transfer to take place? Explain.

4. Kendall Corporation has two divisions: Phoenix and Tucson. Phoenix currently sells a condenser to manufacturers of
cooling systems for P520 per unit. Variable costs amount to P380, and demand for this product currently exceeds
the division's ability to supply the marketplace.

Kendall is considering another use for the condenser, namely, integration into an enhanced refrigeration system that
would be made by Tucson. Related information about the refrigeration system follows.

Selling price of refrigeration system: P1,285

Additional variable manufacturing costs required: P820
Transfer price of condenser: P490

Top management is anxious to introduce the refrigeration system; however, unless the transfer is made, an introduction
will not be possible because of the difficulty of obtaining condensers in the quality and quantity desired. The
company uses responsibility accounting and ROI in measuring divisional performance, and awards bonuses to
divisional management.

Required:
A. How would Phoenix's divisional manager likely react to the decision to transfer condensers to Tucson? Show
computations to support your answer.
B. How would Tucson's divisional management likely react to the P490 transfer price? Show computations to
support your answer.
C. Assume that a lower transfer price is desired. What parties should be involved in setting the new price?
D. From a contribution margin perspective, does Kendall benefit more if it sells the condensers externally or
transfers the condensers to Tucson? By how much?

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AC 42 :: 08.11.18
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