In EXON Inc. division A is a profit centre that produces three items, X, Y and Z. Each item has an external market. X Y Z X Y External market price, per unit $48 $46 $40 Variable cost of production in division A $33 $24 $28 Cont Margin 15 22 12 Labour hours required per unit in division A 4 2 CM per hour 5.50 Product Y can be transferred to division B, but the maximum quantity that might be required for transfer is 300 units of Y. The maximum external sales are 800 units of X, 500 units of Y and 300 units of Z. Instead of receiving transfers of product Y from division A, division B could buy similar units of product Y on the open market at a slightly cheaper price of $45 per unit. What should the transfer price be for each unit if the total labour hours available in division A are i) 3,800 hours ii) 5,600 hours. Solution: Hours required to meet maximum demand: External Sales: Hours х (3 х 800) 2,400 Y (4 x 500) 2,000 Z (2 x 300) 600 5,000 Transfer of Y (4 x 300) 1,200 6,200 Contribution from External Sales: Y Contribution per Unit $ 15 $2 $ 12 Labour hours per unit 3 hrs $ 5.00 4 brs $ 5.50 2 hrs $ 6.00 Contribution per labour Hour Priority for selling 3rd 2nd 1st Total Hours needed 2,400 2,000 600 a) If only 3800 hours of labor are available, Division A would choose, ignoring transfer to B, to sell 300 Z (maximum) 600 500 Y (maximum) 2,000 2,600 400 X (Balance) 1,200 3,800 To transfer 300 units of Y to division B would involve forgoing the sale of 400 units of X because 1,200 hours would be needed to make the transferred units. Opportunity cost of transferring units of Y, and the appropriate transfer price: $ per unit Variable cost of making Y 24 Opportunity cost (contribution of $5 per hour available from selling X externally): 20 benefit forgone (4 hours x $5) Transfer price for Y 44 The transfer price for Y should, in this case, be less than the external market price.
In EXON Inc. division A is a profit centre that produces three items, X, Y and Z. Each item has an external market. X Y Z X Y External market price, per unit $48 $46 $40 Variable cost of production in division A $33 $24 $28 Cont Margin 15 22 12 Labour hours required per unit in division A 4 2 CM per hour 5.50 Product Y can be transferred to division B, but the maximum quantity that might be required for transfer is 300 units of Y. The maximum external sales are 800 units of X, 500 units of Y and 300 units of Z. Instead of receiving transfers of product Y from division A, division B could buy similar units of product Y on the open market at a slightly cheaper price of $45 per unit. What should the transfer price be for each unit if the total labour hours available in division A are i) 3,800 hours ii) 5,600 hours. Solution: Hours required to meet maximum demand: External Sales: Hours х (3 х 800) 2,400 Y (4 x 500) 2,000 Z (2 x 300) 600 5,000 Transfer of Y (4 x 300) 1,200 6,200 Contribution from External Sales: Y Contribution per Unit $ 15 $2 $ 12 Labour hours per unit 3 hrs $ 5.00 4 brs $ 5.50 2 hrs $ 6.00 Contribution per labour Hour Priority for selling 3rd 2nd 1st Total Hours needed 2,400 2,000 600 a) If only 3800 hours of labor are available, Division A would choose, ignoring transfer to B, to sell 300 Z (maximum) 600 500 Y (maximum) 2,000 2,600 400 X (Balance) 1,200 3,800 To transfer 300 units of Y to division B would involve forgoing the sale of 400 units of X because 1,200 hours would be needed to make the transferred units. Opportunity cost of transferring units of Y, and the appropriate transfer price: $ per unit Variable cost of making Y 24 Opportunity cost (contribution of $5 per hour available from selling X externally): 20 benefit forgone (4 hours x $5) Transfer price for Y 44 The transfer price for Y should, in this case, be less than the external market price.
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Transcribed Image Text:In EXON Inc. division A is a profit centre that produces three items, X, Y and Z. Each item has an external market. X Y Z
X
Y
External market price, per unit
$48
$46
$40
Variable cost of production in division A
$33
$24
$28
Cont Margin
15
22
12
Labour hours required per unit in division A
4
2
CM per hour
5.50
6
Product Y can be transferred to division B, but the maximum quantity that might be required for transfer is 300 units
of Y.
The maximum external sales are 800 units of X, 500 units of Y and 300 units of Z.
Instead of receiving transfers of product Y from division A, division B could buy similar units of product Y on the open
market at a slightly cheaper price of $45 per unit.
What should the transfer price be for each unit if the total labour hours available in division A are
i) 3,800 hours
ii) 5,600 hours.
Solution:
Hours required to meet maximum demand:
External Sales:
Hours
х (3 х 800)
2,400
Y (4 x 500)
2,000
Z (2 x 300)
600
5,000
Transfer of Y (4 x 300)
1,200
6,200
Contribution from External Sales:
Y
Contribution per Unit
$ 15
$ 22
$ 12
Labour hours per unit
3 hrs
$ 5.00
4 brs
$ 5.50
2 hrs
$ 6.00
Contribution per labour Hour
Priority for selling
3rd
2nd
1st
Total Hours needed
2,400
2,000
600
a) If only 3800 hours of labor are available, Division A would choose, ignoring transfer to B, to sell
300 Z (maximum)
600
500 Y (maximum)
2,000
2,600
400 X (Balance)
1,200
3,800
To transfer 300 units of Y to division B would involve forgoing the sale of 400 units of X because 1,200 hours would be needed to make the
transferred units.
Opportunity cost of transferring units of Y, and the appropriate transfer price:
$ per unit
Variable cost of making Y
24
Opportunity cost (contribution of $5 per hour available from selling X externally):
20
benefit forgone (4 hours x $5)
Transfer price for Y
44
The transfer price for Y should, in this case, be less than the external market price.
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