The Pacific Company is a multidivisional company. Its managers have full responsibility for profits and complete autonomy to accept or reject transfers from other divisions. Division A produces a sub-assembly part for which there is a competitive market. Division B currently uses this sub-assembly for a final product that is sold outside at $1,200. Division A charges Division B market price for the part, which is $700 per unit. Variable costs are $530 and $600 for Divisions A and B, respectively.
The manager of Division B feels that Division A should transfer the part at a lower price than market because at market, Division B is unable to make a profit.
Instructions
(a) Calculate Division B's contribution margin if transfers are made at the market price, and calculate the company's total contribution margin.
(b) Assume that Division A can sell all its production in the open market. Should Division A transfer the goods to Division B? If so, at what price?
(c) Assume that Division A can sell in the open market only 500 units at $700 per unit out of the 1,000 units that it can produce every month. Assume also that a 20% reduction in price is necessary to sell all 1,000 units each month. Should transfers be made? If so, how many units should the division transfer and at what price? To support your decision, submit a schedule that compares the contribution margins under three different alternatives.

Question

Quizplus · Accepted Answer

The Answer of The Pacific Company is a multidivisional company. Its managers have full responsibility for profits and complete autonomy to accept or reject transfers from other divisions. Division A produces a sub-assembly part for which there is a competitive market. Division B currently uses this sub-assembly for a final product that is sold outside at $1,200. Division A charges Division B market price for the part, which is $700 per unit. Variable costs are $530 and $600 for Divisions A and B, respectively.
The manager of Division B feels that Division A should transfer the part at a lower price than market because at market, Division B is unable to make a profit.
Instructions
(a) Calculate Division B's contribution margin if transfers are made at the market price, and calculate the company's total contribution margin.
(b) Assume that Division A can sell all its production in the open market. Should Division A transfer the goods to Division B? If so, at what price?
(c) Assume that Division A can sell in the open market only 500 units at $700 per unit out of the 1,000 units that it can produce every month. Assume also that a 20% reduction in price is necessary to sell all 1,000 units each month. Should transfers be made? If so, how many units should the division transfer and at what price? To support your decision, submit a schedule that compares the contribution margins under three different alternatives.

The Pacific Company Is a Multidivisional Company