Lola Metals has two decentralized divisions, Stamping and Finishing. Finishing always has purchased certain units from Stamping at $52 per unit. Stamping plans to raise the price to $64 per unit, the price it receives from outside customers. As a result, Finishing is considering buying these units from outside suppliers for $52 per unit. Corporate policy allows division managers to choose both customers and suppliers regardless of the transfer price. Stamping's costs follow: Variable costs per unit Annual fixed costs Annual production of these units sold to Alpha $ 50 $ 63,200 30, 200 units Required: a. If Finishing buys from an outside supplier, the facilities that Stamping uses to produce these units will remain idle. What will be the impact on corporate profits if Lola Metals enforces a transfer price of $64 per unit between Stamping and Finishing? b. Suppose Lola Metals enforces a transfer price of $52 and insists that Stamping sell to Finishing before selling to outside customers. Stamping currently operates at capacity and can easily sell on the outside market the units it sells to Finishing. What cost will Lola Metals incur as a result of this policy?

Lola Metals has two decentralized divisions, Stamping and Finishing. Finishing always has purchased certain units from Stamping at $52 per unit. Stamping plans to raise the price to $64 per unit, the price it receives from outside customers. As a result, Finishing is considering buying these units from outside suppliers for $52 per unit. Corporate policy allows division managers to choose both customers and suppliers regardless of the transfer price. Stamping's costs follow: Variable costs per unit Annual fixed costs Annual production of these units sold to Alpha $ 50 $ 63,200 30, 200 units Required: a. If Finishing buys from an outside supplier, the facilities that Stamping uses to produce these units will remain idle. What will be the impact on corporate profits if Lola Metals enforces a transfer price of $64 per unit between Stamping and Finishing? b. Suppose Lola Metals enforces a transfer price of $52 and insists that Stamping sell to Finishing before selling to outside customers. Stamping currently operates at capacity and can easily sell on the outside market the units it sells to Finishing. What cost will Lola Metals incur as a result of this policy?

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter10: Evaluating Decentralized Operations

Section: Chapter Questions

Problem 17E: Materials used by the Instrument Division of Ziegler Inc. are currently purchased from outside...

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Morrisons Plastics Division, a profit center, sells its products to external customers as well as to other internal profit centers. Which one of the following circumstances would justify the Plastics Division selling a product internally to another profit center at a price that is below the market-based transfer price? a. The buying unit has excess capacity. b. The selling unit is operating at full capacity. c. Routine sales commissions and collection costs would be avoided. d. The profit centers managers are evaluated on the basis of unit operating income.
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