Ingen Production manufactures a top-of-the-line record player, and the Needle division manufactures one of many of the components needed to create the final product. The Needle division has an overall capacity of 150,000 units, which covers all internal needs and leaves enough capacity to sell directly to the external market. Thanks to proper planning, the Needle division has been able to successfully meet all of its production orders, both internally and externally. Ingen evaluates its management on the profitability of their respective divisions, so the managers are very interested in performing analysis on a regular basis. The manager of the Needle division has determined the following costs to be associated with the production of one needle (unit): The manager of the Record Player division mentioned that they can purchase needles externally for $3.70. Use this information to answer the following questions.
a. If the Needle Division sets the transfer price at $3.30, then would this be a good deal for both the Needle division and the Record Player division? Does this transfer price reflect variable cost, absorption cost, cost plus, market, or a cost of a different kind?
b. If the market price were to drop to $2.90, then would this still be a deal that the Needle division would find beneficial? Would they keep the same transfer price established in part a) or would they calculate a new one? Support your response with the appropriate calculations.
c. Assume the market continues to decrease in price. What is the lowest acceptable transfer price that the Needle division could accept? If this came to fruition, then what other measures could the Needle division take in order to try and increase their revenue or reduce their other costs?

Question

Ingen Production manufactures a top-of-the-line record player, and the Needle division manufactures one of many of the components needed to create the final product. The Needle division has an overall capacity of 150,000 units, which covers all internal needs and leaves enough capacity to sell directly to the external market. Thanks to proper planning, the Needle division has been able to successfully meet all of its production orders, both internally and externally. Ingen evaluates its management on the profitability of their respective divisions, so the managers are very interested in performing analysis on a regular basis. The manager of the Needle division has determined the following costs to be associated with the production of one needle (unit):  The manager of the Record Player division mentioned that they can purchase needles externally for $3.70. Use this information to answer the following questions. 
a. If the Needle Division sets the transfer price at $3.30, then would this be a good deal for both the Needle division and the Record Player division? Does this transfer price reflect variable cost, absorption cost, cost plus, market, or a cost of a different kind?
b. If the market price were to drop to $2.90, then would this still be a deal that the Needle division would find beneficial? Would they keep the same transfer price established in part a) or would they calculate a new one? Support your response with the appropriate calculations.
c. Assume the market continues to decrease in price. What is the lowest acceptable transfer price that the Needle division could accept? If this came to fruition, then what other measures could the Needle division take in order to try and increase their revenue or reduce their other costs?

Quizplus · Accepted Answer

The Answer of Ingen Production manufactures a top-of-the-line record player, and the Needle division manufactures one of many of the components needed to create the final product. The Needle division has an overall capacity of 150,000 units, which covers all internal needs and leaves enough capacity to sell directly to the external market. Thanks to proper planning, the Needle division has been able to successfully meet all of its production orders, both internally and externally. Ingen evaluates its management on the profitability of their respective divisions, so the managers are very interested in performing analysis on a regular basis. The manager of the Needle division has determined the following costs to be associated with the production of one needle (unit):  The manager of the Record Player division mentioned that they can purchase needles externally for $3.70. Use this information to answer the following questions. 
a. If the Needle Division sets the transfer price at $3.30, then would this be a good deal for both the Needle division and the Record Player division? Does this transfer price reflect variable cost, absorption cost, cost plus, market, or a cost of a different kind?
b. If the market price were to drop to $2.90, then would this still be a deal that the Needle division would find beneficial? Would they keep the same transfer price established in part a) or would they calculate a new one? Support your response with the appropriate calculations.
c. Assume the market continues to decrease in price. What is the lowest acceptable transfer price that the Needle division could accept? If this came to fruition, then what other measures could the Needle division take in order to try and increase their revenue or reduce their other costs?

Ingen Production Manufactures a Top-Of-The-Line Record Player, and the Needle