Shipping Industries is a decentralized company that evaluates its divisions based on ROI. The North Division has the capacity to produce 2,000 units of a component. The North Division's variable costs are $85 per unit and fixed costs are $70 per unit.
The South Division can use the North Division's product as a component in one of its products. The South Division would incur $65 of variable costs to convert the component into its own product which sells for $310.
Required (consider each question independently):
(a) Assume the North Division can sell all that it produces for $185 each. The South Division needs 100 units. What is the appropriate transfer price?
(b) Assume the North Division can sell 1,800 units at $265. Any excess capacity will be unused unless the units are purchased by the South Division (which can use up to 100 units). What are the minimum and maximum transfer prices?

Question

Quizplus · Accepted Answer

The Answer of Shipping Industries is a decentralized company that evaluates its divisions based on ROI. The North Division has the capacity to produce 2,000 units of a component. The North Division's variable costs are $85 per unit and fixed costs are $70 per unit.
The South Division can use the North Division's product as a component in one of its products. The South Division would incur $65 of variable costs to convert the component into its own product which sells for $310.
Required (consider each question independently):
(a) Assume the North Division can sell all that it produces for $185 each. The South Division needs 100 units. What is the appropriate transfer price?
(b) Assume the North Division can sell 1,800 units at $265. Any excess capacity will be unused unless the units are purchased by the South Division (which can use up to 100 units). What are the minimum and maximum transfer prices?

Shipping Industries Is a Decentralized Company That Evaluates Its Divisions