Textbook Problem

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Corning Company has a decentralized organization with a divisional structure. Two of these divisions are the Appliance Division and the Manufactured Housing Division. Each divisional manager is evaluated on the basis of ROI.

The Appliance Division produces a small automatic dishwasher that the Manufactured Housing Division can use in one of its models. Appliance can produce up to 20,000 of these dishwashers per year. The variable costs of manufacturing the dishwashers are $98. The Manufactured Housing Division inserts the dishwasher into the model house and then sells the manufactured house to outside customers for $73,000 each. The division’s capacity is 4,000 units. The variable costs of the manufactured house (in addition to the cost of the dishwasher itself) are $42,600.

Required:

Assume each part is independent, unless otherwise indicated.

1. 1. Assume that all of the dishwashers produced can be sold to external customers for $320 each. The Manufactured Housing Division wants to buy 4,000 dishwashers per year. What should the transfer price be?
2. 2. Refer to Requirement 1. Assume $24 of avoidable distribution costs. Identify the maximum and minimum transfer prices. Identify the actual transfer price, assuming that negotiation splits the difference.
3. 3. Assume that the Appliance Division is operating at 75 percent capacity. The Manufactured Housing Division is currently buying 4,000 dishwashers from an outside supplier for $290 each. Assume that any joint benefit will be split evenly between the two divisions. What is the expected transfer price? How much will the profits of the firm increase under this arrangement? How much will the profits of the Appliance Division increase, assuming that it sells the extra 4,000 dishwashers internally?

To determine

Identify the transfer price.

Explanation of Solution

Transfer price: It is a price charged on the goods manufactured by the one division and transferred to another division.

Minimum transfer price: It is the absolute lowest price that the selling division will accept.

Maximum transfer price: It is the absolute highest price that the buying division will accept...

To determine

Identify the maximum and minimum transfer prices and identify the actual transfer price.

To determine

Identify the expected transfer price, profits of the firm increased under the given agreement, and increase in the profits of the appliance division.