Question

Selling Price per unit on the outside market $40

Variable cost per unit $21
Fixed costs per unit (based on capacity) $9
Capacity in Units 60,000
Samson Company has a MotorDivison that would like to begin purchasing this transformer
fromthe Electrical Division. The Motor Division is currently purchasing10,000 transformers
each year from another company at a cost of $38per transformer. Samson Company
evaluates its division managers onthe basis of divisional profits.
1. Assume that the Electrical Division is now sellingonly 50,000 transformers each
year to outsidecustomers.
a) From the standpoint of the Electrical Division, what is telowest acceptable transfer price
for transformers sold to the MotorDivision?
The lowest accetpable transfer price is variable cost of $ 21 per unit
b) From the standpoint of the Motor Division, what is thehighest acceptable transfer price
for transformers acquired fromthe Electrical Division?
The highest acceptable transfer price is external purchase price of $ 38 per unit
c) If left free to negotiate without interference, would youexpect the division managers to
voluntarily agree to the transferof 10,000 transformers from the Electrical Division to the
MotorDivision? Why or Why not?
The division managers would agree to transfer of 10,000 transformers as there is range of
prices, between the variable cost and external purchase price, that can be beneficial to
both the divisions.
d) From the standpoint of the entire company, should a transfertake place? Why or Why
not?
Yes, the transfer should take place as it will benefit the company as a whole as the capacity
will be used . There will be savings in purchase cost.
2. Assume that the Electrical Division is now selling tooutside customers all of the
transformers it canproduce.
a) From the standpoint of the Electrical Division, what is telowest acceptable transfer price
for transformers sold to the MotorDivision?
The lowest accetpable transfer price is selling price of $ 40 per unit
b) From the standpoint of the Motor Division, what is thehighest acceptable transfer price
for transformers acquired fromthe Electrical Division?
The highest acceptable transfer price is external purchase price of $ 38 per unit
c) If left free to negotiate without interference, would youexpect the division managers to
voluntarily agree to the transferof 10,000 transformers from the Electrical Division to the
MotorDivision? Why or Why not?
The division managers would NOT agree to transfer of 10,000 transformers as there is
range of prices, between the variable cost and external purchase price.
d) From the standpoint of the entire company, should a transfertake place? Why or Why
not?
It will NOT be beneficial for the company as the unit can be sold at $ 40 per unit and the
transfer can take place at lowest price of variable cost of $ 21 per unit.
Fixed Cost 9
Capacity 60000
Selling pric 40
less: variab 21
19