Galena Corporation manufactures RD34 in its City Division. This output is sold to the Urban Division as a raw material in the Urban Division's product. The City Division also further processes the RD34 into RD35, and then sells it to other companies.
The City Division's variable costs for the basic ingredient are $15 per unit. The Urban Division's variable costs are $5 per unit in addition to what it pays the City Division. The Urban Division has a capacity of 400,000 units and it can sell everything it produces. The market price for the finished additive is $40 per unit. If the City Division converts the RD34 into RD35, it can receive $25 per unit on the open market, but it incurs an additional $4 per unit for this processing.
Required:
(a) What is the lowest price the City Division should be willing to transfer RD34 to the Urban Division, assuming the City Division is not operating at capacity?
(b) What is the lowest price the City Division should be willing to transfer RD34 to the Urban Division, assuming the City Division is operating at capacity?
(c) Ignore parts (a) and (b). Assume that the City Division has a capacity of 500,000 units but can only sell 300,000 on the open market. How many units should the City Division sell externally and how many units should it sell to Urban Division at a transfer price of $20?

Question

Quizplus · Accepted Answer

The Answer of Galena Corporation manufactures RD34 in its City Division. This output is sold to the Urban Division as a raw material in the Urban Division's product. The City Division also further processes the RD34 into RD35, and then sells it to other companies.
The City Division's variable costs for the basic ingredient are $15 per unit. The Urban Division's variable costs are $5 per unit in addition to what it pays the City Division. The Urban Division has a capacity of 400,000 units and it can sell everything it produces. The market price for the finished additive is $40 per unit. If the City Division converts the RD34 into RD35, it can receive $25 per unit on the open market, but it incurs an additional $4 per unit for this processing.
Required:
(a) What is the lowest price the City Division should be willing to transfer RD34 to the Urban Division, assuming the City Division is not operating at capacity?
(b) What is the lowest price the City Division should be willing to transfer RD34 to the Urban Division, assuming the City Division is operating at capacity?
(c) Ignore parts (a) and (b). Assume that the City Division has a capacity of 500,000 units but can only sell 300,000 on the open market. How many units should the City Division sell externally and how many units should it sell to Urban Division at a transfer price of $20?

Galena Corporation Manufactures RD34 in Its City Division