Fabulous Fanny Packs Co. has two divisions that are both profit centers: Materials and Sewing. Fabulous Fanny Packs is known for their luxurious, unique, handmade fanny packs, which is also its only product. In addition to external vendors, the Materials division sells some of its fabric to the Sewing division. The Sewing division uses this fabric to create the fanny packs. Yearly operating income generated from external sales is calculated as follows: One yard of fabric is needed to create each fanny pack. Although the fabric is very unique, the Materials division was able to find an intermediate market where they also sell to external vendors, as reflected in the numbers above. Their operating capacity is 100,000 yards of fabric and they sold 76,420 yards to external vendors. The Materials division received an order from the Sewing division for 20,000 yards of fabric. Fabulous Fanny Packs has been considering whether or not to vertically integrate further by purchasing a retailer so the Sewing division could sell their products internally and sell to external vendors. Use all of this information to answer the following questions. (Do not round your calculations.)
a. What is the minimum acceptable transfer price for the sale of yards to the Sewing division? What is the overall price for the yards of fabric being sold to the Sewing division?
b. Now assume the Sewing division had sought external quotes for 20,000 yards of fabric they needed to purchase and were given a quote of $1.10 per yard plus an additional charge of 2.5% (of initial price) to cover packaging, shipping, and handling. What would the overall price be for this quote? What is the percentage difference between this option and the one calculated in part a)?
c. Which offer should the Sewing division pursue? What factors should be considered when making this decision, and are there any other things they could do that may impact that decision one way or the other?
d. Assume that the sewing department was actually looking to purchase 40,000 yards of fabric from the Materials division. What would the per-unit minimum acceptable transfer price be, and what would the new overall price be?
e. If the market shifted and the external vendors that the Materials division sells to are now going to be offered at $1.72 per yard, would this impact either of the responses provided in part a) or d)? Support this response with the appropriate calculations.

Question

Fabulous Fanny Packs Co. has two divisions that are both profit centers: Materials and Sewing. Fabulous Fanny Packs is known for their luxurious, unique, handmade fanny packs, which is also its only product. In addition to external vendors, the Materials division sells some of its fabric to the Sewing division. The Sewing division uses this fabric to create the fanny packs. Yearly operating income generated from external sales is calculated as follows:  One yard of fabric is needed to create each fanny pack. Although the fabric is very unique, the Materials division was able to find an intermediate market where they also sell to external vendors, as reflected in the numbers above. Their operating capacity is 100,000 yards of fabric and they sold 76,420 yards to external vendors. The Materials division received an order from the Sewing division for 20,000 yards of fabric. Fabulous Fanny Packs has been considering whether or not to vertically integrate further by purchasing a retailer so the Sewing division could sell their products internally and sell to external vendors. Use all of this information to answer the following questions. (Do not round your calculations.) 
a. What is the minimum acceptable transfer price for the sale of yards to the Sewing division? What is the overall price for the yards of fabric being sold to the Sewing division?
b. Now assume the Sewing division had sought external quotes for 20,000 yards of fabric they needed to purchase and were given a quote of $1.10 per yard plus an additional charge of 2.5% (of initial price) to cover packaging, shipping, and handling. What would the overall price be for this quote? What is the percentage difference between this option and the one calculated in part a)?
c. Which offer should the Sewing division pursue? What factors should be considered when making this decision, and are there any other things they could do that may impact that decision one way or the other?
d. Assume that the sewing department was actually looking to purchase 40,000 yards of fabric from the Materials division. What would the per-unit minimum acceptable transfer price be, and what would the new overall price be?
e. If the market shifted and the external vendors that the Materials division sells to are now going to be offered at $1.72 per yard, would this impact either of the responses provided in part a) or d)? Support this response with the appropriate calculations.

Quizplus · Accepted Answer

The Answer of Fabulous Fanny Packs Co. has two divisions that are both profit centers: Materials and Sewing. Fabulous Fanny Packs is known for their luxurious, unique, handmade fanny packs, which is also its only product. In addition to external vendors, the Materials division sells some of its fabric to the Sewing division. The Sewing division uses this fabric to create the fanny packs. Yearly operating income generated from external sales is calculated as follows:  One yard of fabric is needed to create each fanny pack. Although the fabric is very unique, the Materials division was able to find an intermediate market where they also sell to external vendors, as reflected in the numbers above. Their operating capacity is 100,000 yards of fabric and they sold 76,420 yards to external vendors. The Materials division received an order from the Sewing division for 20,000 yards of fabric. Fabulous Fanny Packs has been considering whether or not to vertically integrate further by purchasing a retailer so the Sewing division could sell their products internally and sell to external vendors. Use all of this information to answer the following questions. (Do not round your calculations.) 
a. What is the minimum acceptable transfer price for the sale of yards to the Sewing division? What is the overall price for the yards of fabric being sold to the Sewing division?
b. Now assume the Sewing division had sought external quotes for 20,000 yards of fabric they needed to purchase and were given a quote of $1.10 per yard plus an additional charge of 2.5% (of initial price) to cover packaging, shipping, and handling. What would the overall price be for this quote? What is the percentage difference between this option and the one calculated in part a)?
c. Which offer should the Sewing division pursue? What factors should be considered when making this decision, and are there any other things they could do that may impact that decision one way or the other?
d. Assume that the sewing department was actually looking to purchase 40,000 yards of fabric from the Materials division. What would the per-unit minimum acceptable transfer price be, and what would the new overall price be?
e. If the market shifted and the external vendors that the Materials division sells to are now going to be offered at $1.72 per yard, would this impact either of the responses provided in part a) or d)? Support this response with the appropriate calculations.