Federated Manufacturing Incorporated (FMI) produces electronic components in three divisions: industrial, commercial, and consumer products. The commercial products division annually purchases 13,800 units of part 23–6711, which the industrial division produces for use in manufacturing one of its own products. The commercial division is growing rapidly; it is expanding its production and now wants to increase its purchases of part 23–6711 to 18,800 units per year. The problem is that the industrial division is at full capacity. No new investment in the industrial division has been made for some years because top management sees little future growth in its products, so its capacity is unlikely to increase soon. The commercial division can buy part 23–6711 from Advanced Micro Incorporated or from Admiral Electric, a customer of the industrial division now purchasing 840 units of part 88–461. The industrial division's sales to Admiral would not be affected by the commercial division’s decision regarding part 23–6711. Industrial Division: Data on part 23–6711: Price to commercial division $ 261 Variable manufacturing costs 174 Price to outside buyers 243 Data on part 88–461: Variable manufacturing costs $ 65 Sales price 95 Other Suppliers of Part 23–6711: Advance Micro Incorporated, price $ 238 Admiral Electric, price 248 Required: 1. What is FMI’s unit cost if the commercial division buys its additional 5,000 units of part 23–6711 from the industrial division? From FMI’s perspective, from which supplier (industrial division, Advance Micro Incorporated, or Admiral Electric) should the commercial division buy the additional units? If the sale were made internally, what would the correct transfer price be? 2. Assume that the industrial division’s sales to Admiral will be canceled if the commercial division does not buy from Admiral. What would be FMI’s unit costs of (a) internal transfer and (b) purchasing from Admiral in this case? Would the correct transfer price change?
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Federated Manufacturing Incorporated (FMI) produces electronic components in three divisions: industrial, commercial, and consumer products. The commercial products division annually purchases 13,800 units of part 23–6711, which the industrial division produces for use in manufacturing one of its own products. The commercial division is growing rapidly; it is expanding its production and now wants to increase its purchases of part 23–6711 to 18,800 units per year. The problem is that the industrial division is at full capacity. No new investment in the industrial division has been made for some years because top management sees little future growth in its products, so its capacity is unlikely to increase soon.
The commercial division can buy part 23–6711 from Advanced Micro Incorporated or from Admiral Electric, a customer of the industrial division now purchasing 840 units of part 88–461. The industrial division's sales to Admiral would not be affected by the commercial division’s decision regarding part 23–6711.
| Industrial Division: | |
|---|---|
| Data on part 23–6711: | |
| Price to commercial division | $ 261 |
| Variable |
174 |
| Price to outside buyers | 243 |
| Data on part 88–461: | |
| Variable manufacturing costs | $ 65 |
| Sales price | 95 |
| Other Suppliers of Part 23–6711: | |
| Advance Micro Incorporated, price | $ 238 |
| Admiral Electric, price | 248 |
Required:
1. What is FMI’s unit cost if the commercial division buys its additional 5,000 units of part 23–6711 from the industrial division? From FMI’s perspective, from which supplier (industrial division, Advance Micro Incorporated, or Admiral Electric) should the commercial division buy the additional units? If the sale were made internally, what would the correct transfer price be?
2. Assume that the industrial division’s sales to Admiral will be canceled if the commercial division does not buy from Admiral. What would be FMI’s unit costs of (a) internal transfer and (b) purchasing from Admiral in this case? Would the correct transfer price change?
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