Chapter 13, Problem 52C

1.

To determine

Draw a simple diagram portraying the two divisions and their products and also show the two alternatives that V.T Division has in the production of its TCH–320.

Explanation of Solution

Draw a simple diagram portraying the two divisions and their products and also show the two alternatives that V.T Division has in the production of its TCH–320:

Figure (1)

2.

To determine

Describe whether any of the TCH–320 units should be produced using the high-density panel and if so state the amount to be produced.

Explanation of Solution

Compute the unit contribution margin of an LDP and an HDP as follows:

Particulars	LDP	HDP
Price	$28	$ 115
Less: Variable cost:
Unskilled labor	$5	$ 5
Skilled labor	5	30
Raw material	3	8
Purchased components	4	12
Variable overhead	5	15
Unit contribution margin	$  6	$ 45

Table (1)

Compute the unit contribution margin of V.B division’s TCH-320 under both alternatives, as follows:

Particulars	TCH-320 Using Imported Control Pack		TCH-320 Using an HDP
Price		$270.00		$270.00
Less: Variable cost:
Unskilled labor	$ 4.50		$4.50
Skilled labor	51		85
Raw material	11.50		6
components	150		5
Variable overhead	11		11
Variable cost of manufacturing HDP	0		70
Variable cost of transporting HDP	0		4.50
Total variable cost		228		186
Unit contribution margin		$ 42.00		$ 84.00
Difference		$42 $\left(\$84-\$42\right)$

Table (2)

From the viewpoint of entire company, the limited skilled labor time that is available in the H.B Division is the scarce resource that will limit the overall profit of the company. The division has two products such as LDP and HDP, however it has to be considers as three products, since the units of HDP could be produced either for outside sale or for transfer to the V.T Division. The H.B division’s three products are as follows:

• HDP for external sale
• HDP for transfer
• LDP

From the above the calculations of unit contribution margin, it is clear that the unit contribution margin of an LDP is $6, whereas, the unit contribution of an HDP sold externally is $45. Moreover, the overall unit contribution margin of the company of an HDP produced for transfer is $42. Thus this indicates that there is an increase in the contribution margin unit of the TCH-320 when it is manufactured with the HDP instead of the imported control pack.

Compute the one hour of limited skilled labor at H.B division spent on each of the three products that would contribute toward the overall firm's fixed cost and profit.

Particulars	Unit Contribution Margin (a)	Skilled Labor per  Unit Required (b)	Contribution Margin per hour $\left(\frac{a}{b}\right)$
HDP sold externally	$45	1.5	$30
HDP transferred internally	42	1.5	28
LDP	6	0.25	24

Table (3)

From the viewpoint of the company, the H.B Division should use its limited skilled labor time as follows:

Particulars	Limited skilled labor hours
Skilled labor time available at H.B division	40,000 hours
Less: Produce 6,000 HDPs for external sale $\left(\text{6,000 units}\times \text{1}\text{.5 hours}\right)$	9,000 hours
Hours remaining	31,000 hours
Less: Produce 10,000 HDPs for internal transfer $\left(\text{10,000 units}\times \text{1}\text{.5 hours}\right)$	15,000
Hours remaining	16,000
Produce 64,000 LDPs $\left(\text{64,000 units}\times 0.\text{25 hours}\right)$	16,000
Hours remaining	-0-

Table (4)

Description:

From the above calculation it is clear understood that from the H.B Division, all of the required 10,000 TCH-320 units should be manufactured using the HDP unit.

3.

To determine

Assume that H.B division transfers 10,000 HDP units per year to V division. Describe the effect of this transfer price on the income of the company.

Explanation of Solution

If B division transfers 10,000 HDP units per year to V division, then there will be no effect on the overall income of the company. Because, the transfer price affects only the company's overall profit (which is divided between the two divisions).

4.

To determine

State the minimum transfer price that H.B Division would find acceptable for the HDP.

Explanation of Solution

The minimum acceptable transfer price is set by the general transfer-pricing rule, as follows:

$\begin{array}{c}\begin{array}{l}\text{Minimum acceptable}\\ \text{transfer price}\end{array}\}=\left[\left(\begin{array}{l}\text{Additional outlay}\\ \text{costs incurred}\end{array}\right)+\left(\begin{array}{l}\text{opportunity cost }\\ \text{of the organization}\end{array}\right)\right]\\ =\$70+\$36\\ =\$106\end{array}$

Note:

• The additional outlay cost and the variable cost for manufacturing an HDP are same.
• The opportunity cost is equal to the forgone contribution margin on the LDP units. Thus, the forgone contribution margin is $36$\text{(6 units}\times \text{\$6 unit contribution margin)}$. The 6 $\left(\frac{\text{1}\text{.5 hours}}{\text{0}\text{.25 hours}}\right)$ units are the units of LDP that H.B division could manufacture in 1.5 hours of skilled labor time (required actually for producing HDP for transfer).

5.

To determine

Compute the maximum transfer price that V.T Division would find acceptable for HD.

Explanation of Solution

Compute the maximum transfer price that V.T Division would find acceptable for HD as follows:

Particulars	Amounts in ($)
Imported control pack	$145.00
Other raw material	5.50
Total savings	$150.50
Less: Incremental costs if TCH-320 is produced using an HDP:
Transportation cost	(4.5)
Skilled labor	(34)
Net savings if HDP is used	$112.00

Table (5)

Therefore, the maximum transfer price is $112. If the transfer price is lower than $112, then the V.T Division will be better off with the HDP. Whereas when the transfer price is above $112, then the V. T Division must prefer the control pack.

6.

To determine

Describe whether the corporate controller of company G would recommend a transfer price.

Explanation of Solution

Yes, the company would recommend a transfer, as it is the overall interest of the company. Therefore, any transfer price in the range of $106 to $112 would provide incentives to the management of each division to agree to the transfer.