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The Components Division produces a part that is used by the Goods Division. The cost of manufacturing the part is as follows: Direct materials $10 Direct labor 2 Variable overhead 3 Fixed overhead* Total cost $20 *Based on a practical volume of 200,000 parts. Other costs incurred by the Components Division are as follows: Fixed selling and administrative Variable selling $500,000 $1 per unit The part usually sells for between $28 and $30 in the external market. Currently, the Components Division is selling it to external customers for $29. The division is ca- pable of producing 200,000 units of the part per year; however, because of a weak economy, only 150,000 parts are expected to be sold during the coming year. The vari- able selling expenses are avoidable if the part is sold internally. The Goods Division has been buying the same part from an external supplier for $28. It expects to use 50,000 units of the part during the coming year. The manager of the Goods Division has offered to buy 50,000 units from the Components Division for $18 per unit. Required: 1. Determine the minimum transfer price that the Components Division would ассept. 2. Determine the maximum transfer price that the manager of the Goods Division would pay. 3. Should an internal transfer take place? Why or why not? If you were the manager of the Components Division, would you sell the 50,000 components for $18 each? Explain.

The Components Division produces a part that is used by the Goods Division. The cost of manufacturing the part is as follows: Direct materials $10 Direct labor 2 Variable overhead 3 Fixed overhead* Total cost $20 *Based on a practical volume of 200,000 parts. Other costs incurred by the Components Division are as follows: Fixed selling and administrative Variable selling $500,000 $1 per unit The part usually sells for between $28 and $30 in the external market. Currently, the Components Division is selling it to external customers for $29. The division is ca- pable of producing 200,000 units of the part per year; however, because of a weak economy, only 150,000 parts are expected to be sold during the coming year. The vari- able selling expenses are avoidable if the part is sold internally. The Goods Division has been buying the same part from an external supplier for $28. It expects to use 50,000 units of the part during the coming year. The manager of the Goods Division has offered to buy 50,000 units from the Components Division for $18 per unit. Required: 1. Determine the minimum transfer price that the Components Division would ассept. 2. Determine the maximum transfer price that the manager of the Goods Division would pay. 3. Should an internal transfer take place? Why or why not? If you were the manager of the Components Division, would you sell the 50,000 components for $18 each? Explain.

Principles of Accounting Volume 2
Principles of Accounting Volume 2
19th Edition
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax
Chapter5: Process Costing
Section: Chapter Questions
Problem 1PB: The following product costs are available for Stellis Company on the production of erasers: direct...
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The Components Division produces a part that is used by the Goods Division. The cost of manufacturing the part is as follows: Direct materials $10 Direct labor 2 Variable overhead Fixed overhead* 3 5 Total cost $20 *Based on a practical volume of 200,000 parts. Other costs incurred by the Components Division are as follows: Fixed selling and administrative Variable selling $500,000 $1 per unit The part usually sells for between $28 and $30 in the external market. Currently, the Components Division is selling it to external customers for $29. The division is ca- pable of producing 200,000 units of the part per year; however, because of a weak economy, only 150,000 parts are expected to be sold during the coming year. The vari- able selling expenses are avoidable if the part is sold internally. The Goods Division has been buying the same part from an external supplier for $28. It expects to use 50,000 units of the part during the coming year. The manager of the Goods Division has offered to buy 50,000 units from the Components Division for $18 per unit. Required: 1. Determine the minimum transfer price that the Components Division would аcсept. 2. Determine the maximum transfer price that the manager of the Goods Division would pay. 3. Should an internal transfer take place? Why or why not? If you were the manager of the Components Division, would you sell the 50,000 components for $18 cach? Explain.
Transcribed Image Text:The Components Division produces a part that is used by the Goods Division. The cost of manufacturing the part is as follows: Direct materials $10 Direct labor 2 Variable overhead Fixed overhead* 3 5 Total cost $20 *Based on a practical volume of 200,000 parts. Other costs incurred by the Components Division are as follows: Fixed selling and administrative Variable selling $500,000 $1 per unit The part usually sells for between $28 and $30 in the external market. Currently, the Components Division is selling it to external customers for $29. The division is ca- pable of producing 200,000 units of the part per year; however, because of a weak economy, only 150,000 parts are expected to be sold during the coming year. The vari- able selling expenses are avoidable if the part is sold internally. The Goods Division has been buying the same part from an external supplier for $28. It expects to use 50,000 units of the part during the coming year. The manager of the Goods Division has offered to buy 50,000 units from the Components Division for $18 per unit. Required: 1. Determine the minimum transfer price that the Components Division would аcсept. 2. Determine the maximum transfer price that the manager of the Goods Division would pay. 3. Should an internal transfer take place? Why or why not? If you were the manager of the Components Division, would you sell the 50,000 components for $18 cach? Explain.
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