Division D has asked Division C of the same company to supply it with 4,000 units of part L763 this year to use in one of products. Division D has received a bid from an outside supplier for the parts at a price of £26.00 per unit. Division C has the capacity to produce 15,000 units of part L763 per year. Division C expects to sell 12,000 units of part L763 to outside customers this year at a price of £29.00 per unit. To fill the order from Division D, Division C would have to cut back its sales to outside customers. Division C produces part L763 at a variable cost of £20.00 per unit. The cost of packing and shipping the parts for outside customers is £1.00 per unit. These packing and shipping costs would not have to be incurred on sales of the parts to Division D.
-The optimal range of transfer prices is between

Question

Quizplus · Accepted Answer

The optimal range of transfer prices is between the marginal cost to Division C (£20 variable cost saved by not incurring the £1 packing and shipping cost, totaling £21) and the price Division D would pay to an outside supplier (£26). However, since the question specifies that Division C would have to cut back its sales to outside customers (at £29 per unit), the lower bound should consider the opportunity cost to Division C, which is the selling price to outside customers (£29) minus the variable cost and shipping (£21), leading to a corrected range that should ideally start from £29 for Division C to not incur a loss. However, based on the provided options and the initial calculation mistake, the closest matching option given is £22 to £26, acknowledging a misunderstanding in calculating the lower bound of the range.

Division D Has Asked Division C of the Same Company