Figure 20-2
Klaehn Industries is a decentralized company that evaluates its divisions based on ROI. The Fahl Division has the capacity to make 1,000 units of a component. The Fahl Division's variable costs are £40 per unit.
The Melton Division can use the component in one of its products. The Melton Division would incur £50 of variable costs to convert the component into its own product that sells for £160.
-Refer to Figure 20-2. Assume the Fahl Division can sell 800 units at £120 each. Any excess capacity will be unused unless the units are purchased by the Melton Division, which could use up to 100 units. The maximum transfer price that the Melton Division would be willing to pay would be

Question

Quizplus · Accepted Answer

The maximum transfer price the Melton Division would be willing to pay is the cost it would avoid by not having to make the component itself. Since the Melton Division would incur £50 of variable costs to convert the component, and the selling price of the final product is £160, the maximum it would be willing to pay is £110 (£160 selling price - £50 conversion cost) to maintain its profit margin.

Figure 20-2 Klaehn Industries Is a Decentralized Company That Evaluates Its Divisions