Thai Company has two divisions organized as profit centers: Redmon and Tomlin. Thai expects the following results in the coming period:

Included in Redmon's costs are 100,000 units of a subcomponent purchased from an outside supplier for $4.50 per unit. The managers have recently initiated negotiations for Tomlin to supply the components to Redmon. Tomlin has a total capacity of 400,000 units.
Required:
(a) Would Thai Company prefer the subcomponent used by Redmon to be purchased internally from Tomlin or from the outside vendor? What would be the profit impact of this decision?
(b) What would be the maximum and minimum transfer prices?

Question

Thai Company has two divisions organized as profit centers: Redmon and Tomlin. Thai expects the following results in the coming period:
  
Included in Redmon's costs are 100,000 units of a subcomponent purchased from an outside supplier for $4.50 per unit. The managers have recently initiated negotiations for Tomlin to supply the components to Redmon. Tomlin has a total capacity of 400,000 units.
Required:
(a) Would Thai Company prefer the subcomponent used by Redmon to be purchased internally from Tomlin or from the outside vendor? What would be the profit impact of this decision?
(b) What would be the maximum and minimum transfer prices?

Quizplus · Accepted Answer

The Answer of Thai Company has two divisions organized as profit centers: Redmon and Tomlin. Thai expects the following results in the coming period:
  
Included in Redmon's costs are 100,000 units of a subcomponent purchased from an outside supplier for $4.50 per unit. The managers have recently initiated negotiations for Tomlin to supply the components to Redmon. Tomlin has a total capacity of 400,000 units.
Required:
(a) Would Thai Company prefer the subcomponent used by Redmon to be purchased internally from Tomlin or from the outside vendor? What would be the profit impact of this decision?
(b) What would be the maximum and minimum transfer prices?

Thai Company Has Two Divisions Organized as Profit Centers: Redmon