ABC Enterprises is a multi-divisional firm that makes and sells personal protective equipment to health-care providers and other businesses. Division A manufactures large, state-of-the-art HEPA (high-efficiency particulate air) filters that trap harmful particles. Division A sells HEPA filters to external buyers at the price of $73 per unit. Division A also provides these HEPA filters to Division B; Division B installs these filters in medical-grade Air Purifier Units and sells these Air Purifier Units to external buyers at the price of $906 per unit. Divisions A and B use normal absorption costing, with overhead (all fixed) allocated to units using a sophisticated activity-based costing system. Inventoriable unit costs for the two divisions are: Division A’s HEPA Filters: absorption cost per unit for external sales of $44 (includes $7 fixed overhead allocation); absorption cost per unit for internal transfers of $33 (includes $7.80 fixed overhead allocation). Division B’s Air Purifier Units: absorption cost per unit of $358 (includes $103 fixed overhead allocation). Selling costs for the two divisions are: Division A’s HEPA Filters: variable selling cost for external sales of $13 per unit; no variable selling cost for internal transfers; fixed selling expenses of $347,000 per year; Division B’s Air Purifier Units: variable selling cost for external sales of $73 per unit; fixed selling expenses of $891,000 per year. Division A has significant idle capacity, sufficient to meet all of Division B’s demand for internally transferred HEPA filters. There are many other suppliers of HEPA filters suitable for Division B; Division B’s top management is free to choose between internally sourced and externally purchased filters. What cost-based transfer price should ABC Enterprises set for internal transfers of HEPA filters from Division A to Division B to guarantee incentive alignment?
ABC Enterprises is a multi-divisional firm that makes and sells personal protective equipment to health-care providers and other businesses. Division A manufactures large, state-of-the-art HEPA (high-efficiency particulate air) filters that trap harmful particles. Division A sells HEPA filters to external buyers at the price of $73 per unit. Division A also provides these HEPA filters to Division B; Division B installs these filters in medical-grade Air Purifier Units and sells these Air Purifier Units to external buyers at the price of $906 per unit. Divisions A and B use normal absorption costing, with overhead (all fixed) allocated to units using a sophisticated activity-based costing system. Inventoriable unit costs for the two divisions are: Division A’s HEPA Filters: absorption cost per unit for external sales of $44 (includes $7 fixed overhead allocation); absorption cost per unit for internal transfers of $33 (includes $7.80 fixed overhead allocation). Division B’s Air Purifier Units: absorption cost per unit of $358 (includes $103 fixed overhead allocation). Selling costs for the two divisions are: Division A’s HEPA Filters: variable selling cost for external sales of $13 per unit; no variable selling cost for internal transfers; fixed selling expenses of $347,000 per year; Division B’s Air Purifier Units: variable selling cost for external sales of $73 per unit; fixed selling expenses of $891,000 per year. Division A has significant idle capacity, sufficient to meet all of Division B’s demand for internally transferred HEPA filters. There are many other suppliers of HEPA filters suitable for Division B; Division B’s top management is free to choose between internally sourced and externally purchased filters. What cost-based transfer price should ABC Enterprises set for internal transfers of HEPA filters from Division A to Division B to guarantee incentive alignment?
Step by step
Solved in 2 steps
